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Tax Reform UpdateHighlights as of March 2018

Reg Baker CPA LLC(808) 753-6026reg@regbaker.comwww.regbaker.com

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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.

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Today’s Outline

• General Introduction

• Individual Update

• Business Update

• Closing Comments

• Questions

Reg Baker, CPA PFSE-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)

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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

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Reminder about due dates

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• Form 1065(Partnership)

• Form 1120S(S corporation)

March15

• Form 1040(Individual)

• FinCEN Form 114(Foreign bank reporting)

April17

• Form 1120(C corporation)

April17

• Form 1041(Trust and estate)

April17(Extend until

Sept. 17)(Extend untilOct. 15)

(Extend untilOct. 15)

(Extend untilOct. 1)

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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

39.6%

37.0%

35.0%

35.0%

33.0%

32.0%

24.0%

28.0%

22.0%25.0%

15.0% 12.0%

10.0% 10.0%$-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,0002017

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

2018

Individual Income Tax RatesComparison

33.00%

24.00%28.00%

22.00%25.00%

15.00% 12.00%

10.00% 10.00%$-

$50,000

$100,000

$150,000

$200,000

$250,0002017

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

2018

Individual Income Tax RatesComparison - $250,000 & Lower

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Dividend and capital gains rates unchanged

• The top tax bracket for qualified dividendsand 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

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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

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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

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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

IRC § 199AEligible Taxpayers

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

TYPES OF

TAXPAYERSTHRESHOLD AMOUNT

Married Persons $ 315,000

All others (not C-corps) $ 157,500

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IRC § 199AEligible Taxpayers

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

• 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)

ALL QUALIFY BUT THE COMPUTATION DIFFERS

Is it a Service Business per §§1202(e)(3)(A),475(c)(2), or475(e)(2)?

Is taxable income over

the threshold?315/157.5

Is taxable income over the

threshold?315/157.5

Deduction = QBI x 20%

Deduction =QBI x 20%

Over full Phase – in? 415/207.5

Is taxable income over the full phase-in?

415/207.5Deduction 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

No No

NoNo

No

Yes

Yes Yes

NoDeduction

Deduction Reduced

YesYes

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

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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

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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

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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

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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

Estate & GST Taxes

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

$12,000,000

$10,000,000

$8,000,000

$6,000,000

$4,000,000

$2,000,000

$-

Estate Tax Exemption - Past & Projected

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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

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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)

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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

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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%

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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

Current

Corporate Tax Rates

2018

• 21% flat rate

Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments

Tax Reform Delivered

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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

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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

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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

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Accounting methods for small taxpayers

• Expanded availability of cash method

• Inventory tracking requirements

• Sec. 263A threshold raised

• Expanded availability of completed contract method

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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

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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

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Net operating loss provisions

• No longer allowed to carryback NOLs

• Carried forward indefinitely

• 80% of taxable income may be reduced by NOL

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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

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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

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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%)

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Questions

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