2018 Tax Reform Update - Dixon Hughes Goodman · 2018 Tax Reform Update Asheville, ... to...

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2018 Tax Reform UpdateAsheville, North Carolina

January 26, 2018


Table of Contents

1. S to C Conversions2. Corporate Tax Reform3. Tax Accounting Methods & Impact to Financial Statements4. International Tax Reform5. Real Estate6. Craft Brewers7. Business Interest Limitation8. The QBI Deduction Quagmire9. Capitalizing on Capital Assets10. Professional Service Corporations 11. Individual Tax Reform12. Charitable Planning & Exempt Organizations13. Estate Planning (Panel Discussion)


S to C Conversions

David Dills


S to C Conversion – Time to Consider?

S-Corp Old S-Corp New C-Corp New C-Corp New* C-Corp OldTI – Pre 199 & St tax $10,000,000 $10,000,000 $10,000,000 $10,000,000 $10,000,000

St Tax (5%) $(500,000) $(500,000) $(500,000) $(500,000)

199 $(900,000) $(2,000,000) $(900,000)

ATI $8,600,000 $8,000,000 $9,500,000 $9,500,000 $8,600,000

Highest Fed 39.6% 37% 21% 21% 35%

Fed Tax $(3,405,600) $(2,960,000) $(1,995,000) $(1,995,000) $(3,010,000)

CAFD $7,505,000 $7,505,000 $6,490,000

S Tax $3,460,000

LTCG Rate 23.8% 23.8% 23.8%

Fed tax $(1,786,190) $( 823,480) $(1,467,389)*

ST Tax (5%) $( 500,000) $( 375,250) $( 173,000) $( 324,500)

$5,343,560 $2,463,520 $4,698,111

Net Cash AT $6,094,000 $6,540,000 $5,343,560 $6,508,520 $4,698,111


Candidates to Consider

• S-Corps bumping up against 100 SH limit

• S-Corps that want two classes of stock

• No exit planned or expected within 10 years

• S-Corp distribution history is to only distribute cash for taxes

• S-Corps that have already been considering converting

• International Subs???


Conversion Considerations

• S to C tax rate and net cash after tax analysis

• Conversion/Termination requirements (filings, timing, etc.…)

• Possible re-election after 5 years

• Required Method Changes (481a – 6 yr.)

• Exit ramifications

• Built In Gain implications post re-electing S

• Analyze E&P distributions post re-electing S

• AAA and post termination transition period (PTTP)


Compliance Considerations

• Voluntary revocations must occur by March 15th – no late relief.– Requires consent of majority (+50%)

– Revocation letter and shareholder consent filed with service center

– Can rescind before becomes effective

– If miss 3/15 deadline – effective date is 1/1 of following year.

• Involuntary terminations effective the day the triggering event occurs.– Over 100 shareholders, ineligible shareholder, second class of stock, etc.…

• 5 Year Waiting period to elect S Status & 5 Year BIG Period

• Required Method Changes– Cash to accrual

• PTTP Distributions– Tax free (reduction of stock basis) if paid within PTTP

– PTTP – Basically one year after revocation or 120 days after termination

• Distributions post PTTP– Prior S AAA can be allocated to distributions in equal proportion/ratio of AAA to E&P

– Remaining AAA post S Election?


BIG – Exit Considerations

Asset Sale Pre Revocation Yr 6 – Re-Elect S Yr 11 – Post BIG

Goodwill $40,000,000 $52,500,000 $65,000,000

FMV Assets $50,000,000 $50,000,000 $50,000,000

Tax Basis in Assets $(27,500,000) $(21,500,000) $(16,500,000)

Subject to Recap $22,500,000 $28,500,000 $33,500,000

NUBIG $62,500,000 $77,500,000

AAA $62,500,000 $64,725,000 $98,500,000

C-Corp Tax $(16,250,000)

Dividend Tax $(13,320,000)

Net Cash After Tax $32,930,000

S-Corp FT Tax $(19,450,000) $(20,044,500) $(30,320,000)

BIG Tax NA $(16,275,000) NA

Net Cash After Tax $43,050,000 $44,680,500 $68,180,000


E&P Analysis – Deferral Opportunity?

Post Conversion Year 1 Year 2 Year 3 Year 4 Year 5

S Election Year 6

S AAA $ 10,000,000 $ 8,023,422 $ 6,235,665 $ 4,665,479 $ 3,339,109 $ 2,273,709

Current E&P $ 7,505,000 $ 7,505,000 $ 7,505,000 $ 7,505,000 $ 7,505,000 $ 10,000,000

AE&P - Pre Dividend $ 7,505,000 $ 13,526,578 $ 19,359,335 $ 24,974,521 $ 30,345,891 $ 27,951,291

Total SH Distributions $ 3,460,000 $ 3,460,000 $ 3,460,000 $ 3,460,000 $ 3,460,000 $ 3,460,000

Dividends Paid $ 1,483,422 $ 1,672,243 $ 1,889,814 $ 2,133,630 $ 2,394,600 $ -

AAA Distributions $ 1,976,578 $ 1,787,757 $ 1,570,186 $ 1,326,370 $ 1,065,400 $ 3,460,000

S AAA $ 10,000,000 $ 8,023,422 $ 6,235,665 $ 4,665,479 $ 3,339,109 $ 2,273,709 $ 8,813,709

C AE&P - Post Dividends $ $ 6,021,578 $ 11,854,335 $ 17,469,521 $ 22,840,891 $ 27,951,291 $ 27,951,291

SH Taxes $ (427,226) $ (481,606) $ (544,266) $ (614,485) $ (689,645) $ (3,460,000)

Net Cash to Shareholders $ 3,032,774 $ 2,978,394 $ 2,915,734 $ 2,845,515 $ 2,770,355 $ -

Capital Retained $ 4,045,000 $ 4,045,000 $ 4,045,000 $ 4,045,000 $ 4,045,000 $ 6,540,000

Net Cash After Tax $ 7,077,774 $ 7,023,394 $ 6,960,734 $ 6,890,515 $ 6,815,355 $ 6,540,000

Cumulative Deferred Tax $ (1,734,214) $ (3,414,048) $ (5,031,222) $ (6,578,177) $ (8,049,972)

Dividends Net After Tax $ 4,287,364 $ 8,440,286 $ 12,438,299 $ 16,262,714 $ 19,901,319

C – Cum Net Cash After Tax $ 15,343,560 $ 20,687,120 $ 26,030,680 $ 31,374,240 $ 36,717,800

S - Cum Net Cash After Tax $ 16,540,000 $ 23,080,000 $ 29,620,000 $ 36,160,000 $ 42,700,000

Deferral Opportunity? $ 2,067,772


Questions?


Corporate Tax Reform

Ben Walters


TOP 10 CORPORATE CHANGES

1. Reduced Tax Rate

2. AMT Repealed

3. Net Operating Loss Limitation & Carryover changes

4. 100% Depreciation

5. Interest Expense Limitation

6. DPAD repealed

7. Meals & Entertainment Changes

8. Dividends Received Deduction

9. Credit for Family and Medical Leave

10. Employee Achievement Awards


10. Employee Achievement Awards

Old Law New Law ImportantConsiderations

Planning Item

• Employee achievement awards deductible in total up to $400 or $1,600 if an established written plan existed

• Employee achievement awards can not be in the form of cash, cash equivalents, gift cards, vacations, entertainment, stocks, or other similar items

• Items not considered employee achievement awards and the non-deductible portion of employee achievement awards are includable in employee’s income

• Considerproviding tangible awards (ie. electronics, jewelry, houseware) as employee achievement awards in 2018.

Negative


9. Credit for Family and Medical Leave


Planning Item

• No employer tax credit for paid family and medical leave

• 12.5 % Credit allowed for paid family and medical leave

• Equal to 12.5% of wages paid to qualifying employees during family and medical leave

• Taxpayer cannot take both a credit and deduction. “Denial of Double Benefit”

• Set to expire after December31, 2019.

• Credit will be permanent favorable difference. Be sure to manage corporate effective rate.

Positive


8. Dividends Received Deduction


Planning Item

• 70% dividends received deduction

• 80% dividends received deduction for 20%+ owned corporations

• 100% dividends received deduction for affiliated groups (80%+ owned)

• 70% deductionreduced to 50%

• 80% deduction reduced to 65%

• 100% dividends received deduction for affiliated groups

• Companies with regular income-producinginvestments will need to consider the additional tax generated

• Review your investment portfolio for high-yield dividend investments

• Evaluate ownership structure

Negative


7. Meals & Entertainment Changes


Planning Item

• 50% deduction for eligible meals& entertainment expenses

• 100% deduction for meals provided at employer-operated eating facility for convenience of employer

• No deductionallowed for activities considered to be entertainment, amusement, recreation

• No deduction allowed for membership dues for any business or social clubs

• Meal expenses Limited to 50% for employer-operated eating facilities

• No deduction allowed for operation of employer-operated eating facilities after 12/31/2025

• Create separate general ledger account for non-deductible entertainment expenses

Negative


6. Repeal of Domestic Production Activities

Deduction (DPAD)


Planning Item

• 9% deduction ofthe lesser of qualified production activities income or taxable income

• Deductionrepealed

• Final opportunityto claim deduction for 2017 tax year.

• DPAD was a permanent deduction so be sure manageeffective rate

Negative


5. Interest Expense Limitation


Planning Item

• Interest expense generally deductible

(Subject to earnings stripping rules)

• Earnings stripping rules repealed and replaced with limitation

• Net interest expense is limitedto 30% of adjusted taxable income (EBITDA)

• Disallowed amounts are carried forward indefinitely

• For consolidated filers, the limitation applies at the consolidated level

• Limitation applies only to business interest, not investment interest

• Does not apply to small businesses (less than $25M average gross receipts)

• Consider debt restructuring and refinancing options

• Implement strategies which increase EBITDA

Negative


4. 100% Depreciation


Planning Item

• 50% deduction for new tangible property and qualified improvement property

• 100% deductionfor tangible property purchased and placed in service after 9/27/2017

• Property can be new or used

• Applies to non-structuralproperty

• Deduction is a timing item

• 100% deduction begins to phase out in 2023 –consideraccelerating any large CAPEX purchases

Positive


3. Net Operating Loss Limitations and Carryovers


Planning Item

• Deduction allowed to extent of taxable income

• Could be carried back 2 years or forward 20

• Deduction limited to 80% of taxable income

• Indefinitecarryforward

• No carrybacks allowed unless losses incurred in farming businesses

• NOLs can no longer completely eliminate taxable income

• Losses arising before 1/1/2018won’t be subject to limitation

• Because of limitation, NOL carryforwards have less value than a current deduction

• Plan for taxes due in future income producing years

Negative


2. Repeal of Alternative Minimum Tax


Planning Item

• Tax equaled 20% of AMTI, less exemptions and AMT foreign tax credits

• AMT NOL carryforwards limited to 90% of alternative minimum taxable income

• No corporate AMT

• AMT credits from prior years may now offset regular tax liabilities

• AMT credits are refundable at 50% until 2020 and 100% starting in 2021

• Considerinterplay between NOL limitation and repeal of AMT

Positive


1. Corporate Tax Rate Reduction


Planning Item

• Graduated Rate with 35% Highest Tax Bracket

• 21% Flat Rate • Deduction for State Taxes will have less value

• Defer Income and Accelerate Deductions

Positive


Corporate – NOL & AMT Credit Carryforwards

FACTS

• Corporate Taxpayer with calendar year end

• AMT Credit Carryforward at December 31, 2017: $100

• Taxable Income / (Loss) as follows:

2017 2018 2019 2020 2021

($1,500) ($4,000) $1,000 $3,000 $1,500

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• 2017 NOL of $1,500

• Law allows carryback two years or carryforward 20 years

• No income to offset in carryback period; Must be carried forward

• 2018 NOL of $4,000

• May only be carried forward indefinitely; Usage limited to 80% of pre-NOL taxable income

2017 2018 2019 2020 2021

($1,500) ($4,000) $1,000 $3,000 $1,500

2017 2018 2019 2020 2021

($1,500) ($4,000) $1,000 $3,000 $1,500

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2017 2018 2019 2020 2021

Taxable Income ($1,500) ($4,000) $1,000 $3,000 $1,500

Pre-Reform NOL - - (1,000) (500) -

Post-Reform NOL - - - (2,400) (1,200)

Net Taxable Income ($1,500) ($4,000) - $100 $300

Tax Rate 35% 21% 21% 21% 21%

Tax Liability - - - $21 $63

AMT Credit C/F - - - (60) (40)

Net Tax Liability /

(Refund)

- - - ($39) $23

AMT Credit Usage 2020

Allowable Credit $21

50% of Excess $39 ($100 - $21 = $79 x 50%)

Total Allowable Credit $60

25


Questions?


Tax Accounting Methods & Impact to

Financial Statements

Ben Walters & David Wiggins


What is a Tax Accounting Method? (IRC 446)

General rule

“Taxable income has to be computed under the method of accounting the taxpayer uses to regularly compute income in keeping his books”

Exceptions

“Exceptions from book methods are permitted when specific tax provisions permit or require special tax accounting methods.”

“If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income.”


How to change an accounting method?

• A taxpayer has to secure IRS consent before changing an accounting method

• In general, to obtain IRS consent to an accounting method change, a taxpayer files Form 3115, Application for Change in Accounting Method, during the tax year in which the taxpayer desires to make the change

• No Statute of Limitations• 481(a) Adjustment

• In many cases, the taxpayer receives audit protection for pre-change years for items that are subject to the change.

• Automatic vs. Non-automatic Change

NOTE: A change in method of accounting is not the same as a correction of an error or change of facts (e.g. change in capitalization threshold).


Impact related to Tax Reform

• Specific revisions impacting accounting methods:

• Gross receipts limit for cash-method use by C corporations raised from $10 million to $25 million

*Does not include companies recording inventory

• UNICAP rules is expanded to apply to producers and resellers meeting the $25 million gross receipts test

• Deferral and inclusion of advanced payments can not be longer than as reported for financial statements- Excludes mortgage servicing rights

NOTE: Regulations and Commentary have yet to be issued. If any changes or clarifications arise with relation to the 2017 Tax Cuts and Jobs Act, a Form 3115 is the answer.


Enacted vs. Effective Date


Enacted vs. Effective

EXAMPLE:

“The President signed the bill into law on December 22, 2017. The new rates apply to tax years beginning on or after January 1, 2018.”

Enacted Date: December 22, 2017

Effective Date: January 1, 2018



“The effect of a change in tax laws or rates shall be recognized at the date of enactment.”-ASC 740-10-25-47

“Deferred tax liabilities and assets shall be adjusted for the effect of a change in tax laws or rates. A change in tax laws or rates may also require a reevaluation of a valuation allowance for deferred tax assets.”-ASC 740-10-35-4

“When deferred tax accounts are adjusted as required by paragraph 740-10-35-4 for the effect of a change in tax laws or rates, the effect shall be included in income from continuing operations for the period that includes the enactment date.”-ASC 740-10-45-15



If a law is enacted subsequent to the balance sheet date, but prior to issuance of the financial statements, it would be considered a non-recognized subsequent event. Companies should determine (based on materiality) whether to disclose the change in tax law and an estimate of its expected impact.

EXAMPLE: Legislation enacted December 22, 2017 would be a non-recognized subsequent event for a corporation with a November 30th fiscal year end.



ENACTED: The date the legislation is signed into law (in the U.S., typically by the President or State Governor or by legislative override)

EFFECTIVE: The date the legislation takes effect


Re-measurement of Deferred Taxes


Re-measuring of DTAs(DTLs)

• Corporate Rate of 21% reflected for deferred tax assets and liabilities expected to reverse after 12/31/2017• Flat rate, no brackets• No special rate for Personal Service Corporations

• Blended statutory tax rate complexity for fiscal year taxpayers Portion of year at 35%, portion at 21%. IRC §15 governs blending of rate

• Reduced “Federal Benefit of State” effect on state effective tax rates

• For U.S. GAAP purposes, all re-measurement effects of deferred tax balances should be recorded to income from continuing operations as of the enactment date. This includes deferred tax balances that were originally recorded to Other Comprehensive Income (“OCI”) (U.S. GAAP prohibition against backwards tracing)

(rules differ for IFRS purposes on backwards tracing)

Immediate Consideration


Re-measuring of DTAs(DTLs)

• Rate change may result in disproportionate tax effects being lodged in AOCI• Will commonly apply to companies with portfolios of available-for-sale

securities• Could apply to various other items that are accounted for through OCI, such

as pensions, currency translation, etc.

• FASB recently issued a proposed ASU that allows a reclass from AOCI to retained earnings for the "lodged" tax effect that will reside in AOCI.• Effective for fiscal years beginning after December 15, 2018. However, can

early adopt before 2017 financial statements are issued.



Selected Domestic Items


Misc. Domestic Items - NOLs

• NOL utilization limited to 80% of taxable income* Note –Potential impact on valuation allowance considerations

• NOL carrybacks eliminated* Note –Loss of source of taxable income for valuation allowance analysis

• NOL carryforward period is indefinite* Note –This impacts ability to use tax planning strategy for mitigation of

valuation allowance on NOL carryforwards

• Applicable for NOLs generated after 1/1/2018.



Misc. Domestic Items - AMT

• Corporate AMT Repealed

• AMT Credit Carryforwards:

• Fully offset regular tax liability beginning in 2018• Excess credits 50% partially refundable through 2020• Remaining credits fully refunded in 2021• Release any current valuation allowance against AMT

credits



Misc. Domestic Items

• Consider State conformity dates with IRC

• IRS Directive (LB&I-04-0917-005) on ASC 730 for R&D Costs* Opportunity to release FIN 48 reserve on R&D positions

• R&D costs under §174 to be amortized over 5 years rather than immediately expensed beginning in 2022

• Retains tax credits for R&D, LIHTC, NMTC and energy



SEC Staff Guidance


SEC Staff Guidance

• SEC Staff issued transition guidance on December 22, 2017

• Guidance provides a “measurement period” for issuers to evaluate the impacts of tax reform on their financial statements

• Staff Accounting Bulletin (SAB) No. 118

• Compliance and Disclosure Interpretation 110.02

• During the measurement period, the SEC Staff expect that entities will be acting in good faith to complete the accounting under ASC Topic 740

“Measurement period” not to exceed beyond one year from the enactment date


SEC Staff Guidance

1. Complete tax accounting for tax effects of the “Act” where possible

2. Where complete accounting not possible, complete reasonable estimate

1. Provide complete accounting later within measurement period

3. Where reasonable estimate not possible, provide detailed disclosure around why a reasonable estimate is not possible

1. Provide reasonable estimate later within measurement period2. Provide complete accounting when available within measurement

period


Questions?


International Tax Reform

Charles Edge


International Tax Reform: Key Provisions

• Participation exemption for dividends (DRD)

• Deemed repatriation of Post 1986 Earnings and Profits

• Global Intangible Low Taxed Income (“GILTI”)

• Deduction for Foreign Derived Intangible Income (“FDII)

• Base Erosion Anti-Abuse Tax (“BEAT”)

• Subpart F and Hybrid Transactions

• Tax Reform Implications for the IC DISC


Participation Exemption & Deemed

Repatriation of Foreign Earnings


Participation Exemption – Dividends Received

Deduction

New Participation Exemption – Section 245A

The Good News: • 100% deduction for foreign-source portion of dividends received by

a 10% owner of a foreign corporation• Foreign source portion based on ratio of undistributed foreign

earnings to total undistributed earnings• Deemed dividends under Section 1248 are eligible for DRD if stock

held for at least 1 year

The Bad News: • DRD only available to domestic “C” Corporations (except RIC’s &

REITS)• No FTC or deduction, including withholding taxes• Does not apply to “hybrid” dividends


Deemed Repatriation of Post 1986 Earnings &

Profits as of 12/31/2017

• Tax is assessed at 15.5% of E&P invested in cash and cash equivalents. Remainder is taxed at 8%.

• Tax applies to “Specified Foreign Corporations”. • SFC is a CFC or foreign corporation that has at least one

domestic shareholder that is a US corporation. Applies to all US shareholders of a SFC

• Repatriation amount is treated as “Subpart F” income to US shareholders

• Foreign tax credits can be applied, subject to a “haircut” for the reduction in US tax rate

• Tax can be paid over eight years


GILTI?


Global Intangible Low-Taxed Income (GILTI)

GILTI - Section 951A

• GILTI generally means the excess (if any) of a US shareholder’s “net CFC tested income” over the shareholder’s “net deemed tangible income return” with respect to the CFC’s tangible assets for the year.

• Net deemed tangible return = excess of 10% of qualified business asset investment over interest expense deducted in determining “tested income”

• GILTI is determined on an aggregate basis by taking into account the income and losses of each CFC with respect to which the shareholder is a US shareholder.

o Section 951A requires US shareholders of CFCs to include their pro rata share of GILTI in current income, similar to other Subpart F inclusions

53


GILTI

• US shareholders that are C Corporations are allowed a deduction of up to 50% of the GILTI inclusion amount – resulting in an ETR of 10.5%

• Non-corporate shareholders pay tax on GILTI at ordinary income rates with no deduction

• A foreign tax credit is available to corporate shareholders, limited to 80% of foreign taxes paid.


GILTI Example

• A CFC that is a qualified foreign corporation earns $1,000,000 of non-Subpart F income and pays $150,000 of foreign tax. The CFC has $500,000 of adjusted basis in its tangible personal property.

• The GILTI inclusion for the US shareholder is $800,000 ($850,000 of net CFC tested income less $50,000 of net deemed tangible income return).

Implications for Individual Shareholder

$800,000 GILTI Inclusion (plus Sec. 78 gross up)

$0 No deduction for GILTI

$800,000 US Taxable Inclusion

$296,000 US Tax on GILTI Inclusion @ 37%

$0 No credit for indirect foreign taxes paid

$296,000 Net US Tax Due

Implications for Corporate Shareholder

$800,000 GILTI Inclusion (plus Sec. 78 gross up)

$400,000 Less 50% Deduction for GILTI

$400,000 US Taxable Inclusion

$84,000 US Tax on GILTI Inclusion @ 21%

$84,000 Less credit for foreign taxes

$0 Net US Tax Due


Foreign Derived Intangible Income


Foreign-Derived Intangible Income Deduction -

FDII

Foreign Derived Intangible Income - Section 250

Provides for a deduction of up to 37.5% of a domestic corporations FDII for the year (resulting in an effective rate on FDII of 13.125%)

The deduction decreases to 21.875% for years beginning after 12/31/25 (resulting in an effective rate of 16.406)

FDII is only available to C Corporations – it will benefit corporations with low fixed asset values – such as companies in services or technology sectors


FDII

What income is eligible for the deduction?

• Property sold to any non-US person which is for foreign use or

• Services provided to any person, or respect to property, not located in the US

• Foreign use = any use, consumption or disposition which is not in the US


FDII

• FDII in NOT deductible, rather it is used to determine the ratio of FDII to Gross income. This ratio is then applied to deemed intangible income

• Deemed intangible income = Net income less the deemed tangible income return

• Deemed tangible income return = qualified business asset investment x 10%

International: Foreign-Derived Intangible Income (FDII) Deduction

EXAMPLE

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US MANUFACTURING COMPANY US SERVICE COMPANY

Net Income from Domestic Sales $700 Net Income from Domestic Sales $700

Net Income from Foreign Sales 300 Net Income from Foreign Sales 300

Total Net Income $1,000 Total Net Income $1,000

Tangible Property $5,000 Tangible Property -0-

Deemed Intangible Income $500 Deemed Intangible Income $1,000

Equal to: $1,000 – ($5,000 x 10%) Equal to: $1,000 – ($0 x 10%)

Foreign Derived Intangible Income $150 Foreign Derived Intangible Income $300

Equal to: ($500 x $300) / $1,000 Equal to: ($1,000 x $300) / $1,000

FII Deduction $56 FII Deduction $113

Equal to: $150 x 37.5% Equal to: $300 x 37.5%


Base Erosion Anti-Abuse Tax

“BEAT”


Base Erosion and Anti-Abuse Tax

BEAT Tax – Section 59A

Acts as a minimum tax for corporations that have a “base erosion percentage” >3%

Base Erosion % = “base erosion payments / total deductions

Applies to US corporations with average annual gross receipts > 500 million

Base Erosion Payment = Any payment to a foreign related person after 2017 for which a deduction is allowed –excluding amounts paid for COGS and eligible services


Base Erosion and Anti-Abuse Tax

• Related person = direct, indirect, or constructive ownership of at least 25% (vote or value); any person related to the corporation or 25% owner under Sec. 267(b) or 707(b)(1); and any person related for purposes of TP rules

• Tax = 10% x Modified Taxable Income – R&D credits and 80% of applicable Section 38 credits

• No FTC’s or deductions


Subpart F & Hybrid Instruments


Subpart F Revisions

• Section 956 Investment in US Property remains intact

• Modification of Stock Attribution rules for CFC determination – Section 958(b)(4) repealed, US person treated as owning stock held by related foreign person

• Elimination of 30 day rule - foreign corp no longer must be a CFC for uninterrupted period of 30 days for subpart F to apply. US shareholder must own stock on last day of CFC’s tax year


Hybrid Instruments

• Denial of deductions for interest or royalty payments paid or accrued to a related party if there is no income recognized by related party

• No deductions for “disqualified related party amounts” paid to or from a hybrid entity or pursuant to a hybrid transaction– Hybrid entity = any entity treated as fiscally transparent for

U.S. tax purposes but not for foreign tax purposes, or vice versa

– Hybrid transaction = any transaction, instrument, or agreement in which payment is treated as interest or royalties for US tax purposes but not for foreign tax purposes


IC DISC Considerations


IC DISC

IC DISC : Land of the Walking Dead?

• Rate arbitrage for individual taxpayers reduced from 15% to 6%

• For corporations, benefits of deferral from DISC less attractive with the FDII deduction

• Roth IRA strategy more appealing due to reduction in corporate tax rate, recent cases still under appeal


Questions?


Real Estate

Dennis Theodossis & Anthony Stroupe


Agenda

• Real Estate Investor• 20% Pass-through deduction• Interest Expense Limitation• Grouping• Rehabilitation Credits• Qualified Improvement Property• Like Kind Exchanges• Opportunities & Questions

• Real Estate Professional• Interest Limitation Election Out• ADS vs MACRS• Cost Segregation Studies• NOLs• Opportunities & Questions


Real Estate Investors



20% Pass Through Deduction

• The 20% deduction of qualified QBI will be limited to the greater of:– 50% of taxpayer’s share of business’s W-2 wages, or

– Sum of 25% of share of W-2 wages plus 2.5% of unadjusted basis of qualified property

• Depreciable tangible property is the cost of property which is– Available for use in qualified trade or business

– Used in the production of qualified income during the year

– Depreciable period has not ended before close of year• Depreciable period is the later of:

• 10 years after the placed in service date, or

• Last day of applicable recovery period for depreciation purposes


Interest Expense Limitation

• Real Property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business can elect out.

• $25 Million-gross-receipts-test

• At the Partnership/S-Corp Level

• Individuals test is applied as if Corporation or Partnership


$25 Million-Gross-Receipts Test

• Aggregation based on Sec. 52(a), 52(b) or Sec 414(m) and 414(o)

– “More than 50%” of the total combined voting power.

– “Common Control”

– IRS Regulations to come

– Self-Rental vs Real Estate LLC


Rehabilitation Credits

• 20% Credit for Qualified Rehabilitation Expenditures (QRE)

• Still in effect

• Have to take over 5 Years

• 10% Credit of QRE is repealed

• Transition Rule


Qualified Improvement PropertyImprovement to Interior of Non-Residential Real Property

• Old Law• Qualified Leasehold Improvement

Property• Qualified Restaurant Property• Qualified Retail Improvement

Property• Placed in Service after

Building• After 3 yrs. 15 Yr. SL• Before 3 yrs. 39 Yr. SL• Both Eligible for Bonus

• Does not include• Building Enlargement• Elevator or Escalator• Internal Structural

Framework

• New Law

• Removes the 3 categories

• Replaces with QIP

• Placed in Service after Building

• Class Life 39 Yr. - Glitch in the Law

• Not Eligible for Bonus

• Does not include

• Building Enlargement

• Elevator or Escalator

• Internal Structural Framework


Like Kind Exchanges

• Real Property only after 12/31/2017

• Deals with Personal Property will need to be planned for

• Expanded expensing under “Bonus Depreciation” should help offset

• If LKE started in 2017 can be completed under old law


Opportunities & Questions

• Could Real Estate Activities Be 212 Activity?

• Effect on Highly Leveraged Real Estate

• Grouping – Business and Real Estate


Real Estate Professional



Interest Limitation Election

• Real Property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business can elect out.

• $25 Million-gross-receipts test - under no election is needed• Be aware of Grouping

• Election is Irrevocable

• Have to Use Alternative Depreciation System (ADS)


Alternative Depreciation System

• Nonresidential Real Property

• Residential Real Property

• Qualified Improvement Property

• All other class life assets can use MACRS

• Method Change – File 3115 to change form MACRS to ADS


MACRS vs ADS

MACRS

• QIP – 39 Yr SL**

• Residential Property – 27.5 Yr SL

• Non-Residential Property – 39 Yr SL

• **Law has omission. Conference Report says 15 Yr. SL. Keep your fingers crossed.

ADS

• QIP – 20 Yr SL

• Residential Property – 30 Yr SL

• Non-Residential Property – 40 Yr SL

• Not eligible for Bonus


Cost Segregation Studies

• Will be even more important to have shorter class lives

• Used assets are eligible for bonus

• Careful planning when used with Like-Kind Exchange


Loss Limitations

• Excess business loss - limited to $250k ($500k if a joint return)

• Limits NOL use to 80% of taxable income

– Must carryforward i.e. no carryback


Opportunities and Questions

• ADS Conversion – Are prior assets Grandfathered in?

• Effect of NOL limitation


Craft Beverages

Dennis Theodossis & Hilary Davenport


Craft Beverages

Craft Beverage Modernization and Tax Reform Act

Lower Federal Excise Tax Rates

Beer

• Small brewers (not exceeding 2 million bbl per year) saw tax

rates drop from $7 to $3.50 per bbl on first 60,000 bbl

• All other brewers (not exceeding 6 million bbl) saw tax rates

dropped from $18 to $16 per bbl

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Craft Beverages

Example:

Mo Money Brewing Company produced and removed from inventory 50,000 barrels in both 2017 and 2018. The resulting federal excise tax due was as follows:

2017 2018

Production 50,000 bbl 50,000 bbl

Fed excise tax rate $7.00 $3.50

Fed excise tax due $350,000 $175,000


Craft Beverages

Lower Federal Excise Tax Rates cont.Distilled Spirits• Small distillers (up to 100,000 proof gallons) saw tax rates drop from

$13.50 to $2.70 per proof gallon• All other distillers (not exceeding 22,130,000 proof gallons) saw tax

rates drop from $13.50 to $13.34 per proof gallon

Wine• Historically, winemakers who produced no more than 250,000 gallons

annually, received a credit of $.90 per gallon against the excise tax. Under new law, the credit increased and was made available to more winemakers as follows.

• Winemakers receive a $1.00 credit per gallon for the first 30,000 gallons produced; plus

• $.90 per gallon credit for the next 70,000 gallons produced; plus• $.535 per gallon credit for the next 520,000 gallons produced


Craft Beverages

Lower Federal Excise Tax Rates cont.

Issues• The reduced excise rates on beer and distilled spirits are only available in

2018 and 2019

• The increased credits against federal excise tax for wine are only available

in 2018 and 2019

• Lower federal excise tax rates on beer and distilled spirits are subject to

special rules for controlled groups.

• Similar branded, licensed, or franchised beer and distilled spirits companies

are treated as a single taxpayer for determining reduced federal excise tax

rates.


Craft Beverages

Excise Tax Free Transfers of Beer and Distilled Spirits Among Producers

• Historically, tax free transfers of beer between breweries with the same ownership was permissible, including when one of the breweries has a controlling interest in the other brewery, or the same person or persons have controlling interest of both breweries.

• The CBMTRA has expanded this provision to allow for tax free transfers between bonded breweries even when there is no common ownership, so long as the transferring brewery divested itself of all interest in the beer and transferee brewery accepts the responsibility to pay the excise tax.

• Tax free transfers of distilled spirits are allowable now for both packages in bulk containers and individual bottles. Previously, only transfers in bulk were allowed.

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Craft Beverages

UNICAP

• After 2017, if a manufacturers average gross receipts over the last three years does not exceed $25 million, they are exempt from UNICAP

• The CBMTRA reduced the production period for the UNICAP requirement of interest expense related to equipment. The production period no longer includes the aging period of beer, wine, or distilled spirits for purposes of the interest capitalization rules for UNICAP.


Craft Beverages

Deduction of Certain Pass-through Income & Interplay with DPAD• Historically, US manufacturers were eligible for an annual deduction

equal to 9% of the lesser of qualified domestic production activities income or taxable income, known as the DPAD

• Under new law, DPAD has been repealed for tax years beginning after 12/31/17

• The Tax Cuts and Jobs Act now provides individual taxpayers a deduction for 20% of their domestic qualified business income from partnerships, S corporations, or sole proprietorships

THE RESULT… MANUFACTURERS ONLY STAND TO BENEFIT 11% WHILE OTHERS WILL SEE 20%


Craft Beverages

Example:

Newton Belgium is a 50% partner in Old World Brewing Company, a pass-through entity. Newton had $100,000 of taxable income from Old World Brewing Company in both 2017 and 2018. The results on his personal tax return were as follows.

2017 2018

OWBC income $100,000 $100,000

DPAD deduction (9,000) 0

20% pass-through deduction 0 (20,000)

Newton’s federal taxable income 91,000 80,000**The reduction in Newton’s taxable income is only an 11% difference ((20,000-9,000 )/ 100,000).


Craft Beverages

Temporary 100% expensing for certain business assets

• Bonus depreciation increased from 50% to 100% for property placed in service between 9/27/17 and 12/31/2022…. But there’s a catch

• Typically, North Carolina does not conform to federal bonus depreciation rules and requires an 85% addback

• The result…what creates a loss for federal, results in taxable income for NC


Craft Beverages

Example:Assume that in 2017 and 2018 Lupulin Brewing Company purchased new equipment for $200,000. Before any equipment deductions Lupulin Brewing Company had $100,000 of taxable income. Larry Lupulin, the sole shareholder experienced the following effect on his personal tax return in 2017 and 2018 as a result of the treatment for bonus depreciation.

2017 2018LBC income 100,000 100,000LBC bonus depreciation -100,000 -200,000Larry’s federal taxable income 0 -100,000Larry’s NC taxable income 85,000 170,000Larry’s NC tax (rate of 5.499%) 4,674 9,348


Questions?


Business Interest Limitation

David Dills


Important Details - Interest Limitation

• Business Interest may be limited under new law

• Limitation is 30% of ATI plus any floor plan interest

• ATI is in general terms EBITDA

• Limit is determined at filer level

• Disallowed interest eligible for carryover – indefinitely

• Small business exception

• Service company exception

• Section 212 - exclusion

• ADS election


Considerations- Interest Limitation

• Acquisition Interest

• Interest Tracing – Debt Financed Distributions

• Utilization of PT Excess Taxable Income

• Common Control/Controlled Group Ramifications

• Grouping Ramifications


General Illustration – Operating S Corp

Operating S Real Estate LLC Investment LLC Individual

Non Biz Interest $- $- $- $ 100,000

Biz Income – Not FT $- $- $- $ 250,000

Gross Revenue $100,000,000 $ 4,000,000 $ 1,000,000

Business Int Exp $ 3,000,000 $ 2,100,000 $ 500,000

Floorplan Int $- $- $-

Acquisition Int Exp $ 500,000 $- $- $ 500,000

Debt Fin Dist - Int $- $ 200,000 $- $ 200,000

TI $ 10,000,000 $ 50,000 $ 100,000

ATI – (EBITDA) $ 15,500,000 $ 3,350,000 $ 800,000

Other 163(j) Limits $- $- $-

30% Limitation $ 4,650,000 $ 1,005,000 $ 240,000

Excess Biz Interest $- $ 1,095,000 $ 260,000 $ 1,355,000

Excess ATI NA $- $- $-

Limitation $ 75,000

Biz Int Deduction $ 75,000

Non Biz Int Deduction $ 100,000

Disallowed $ 1,880,000


General Illustration – Operating Partnership

Operating PTR Real Estate LLC Investment LLC Individual


Biz Income – Not FT $- $- $- $ 250,000

Gross Revenue $100,000,000 $ 4,000,000 $ 1,000,000

Business Int Exp $ 3,000,000 $ 2,100,000 $ 500,000



Debt Fin Dist - Int $- $ 200,000 $- $ 200,000

TI $ 10,000,000 $ 50,000 $ 100,000

ATI – (EBITDA) $ 15,500,000 $ 3,350,000 $ 800,000


30% Limitation $ 4,650,000 $ 1,005,000 $ 240,000

Excess Biz Interest $- $ 1,095,000 $ 260,000 $ 1,355,000

Excess ATI $ 5,500,000 $- $- $ 5,500,000

Limitation $ 1,725,000



Disallowed $ 1,455,000


Illustration – When Exceptions Apply

Operating S Real Estate LLC Investment LLC Individual


Income – Not FT $- $- $- $ 250,000

Gross Revenue $100,000,000 $ 4,000,000 $ 1,000,000

Business Int Exp $ 3,000,000 $ 2,100,000 $ 500,000



Debt Fin Dist - Int $- $ 200,000 $- $ 200,000

TI $ 10,000,000 $ 50,000 $ 100,000

ATI – (EBITDA) $ 15,500,000 $ 3,350,000 $ 800,000


30% Limitation $ 4,650,000 $- $-

Excess Biz Interest $- $- $- $-

Excess ATI NA $- $- $-

Limitation $ 75,000



Disallowed $ 525,000


Illustration – ADS Election

Real Estate LLC ADS Election

Gross Revenue $ 57,150,000 $ 57,150,000

Gross Revenue $ 4,000,000 $ 4,000,000

Business Int Exp $ 2,100,000 $ 2,100,000

Debt Fin Dist - Int $ 200,000 $ 200,000

TI $ 50,000 $ 50,000

ATI – (EBITDA) $ 3,350,000 $ 36,635

Other 163(j) Limits $- $-

30% Limitation $ 1,005,000 $-

Excess Biz Interest $ 1,095,000 $-

Revised TI $ 1,145,000 $ 86,635

ADS Election Benefit $ 1,058,365

Income $ 4,000,000 $ 4,000,000

Interest Exp $( 2,100,000) $( 2,100,000)

Depreciation $( 1,465,385) $( 1,428,750)

RE Taxes $( 250,000) $( 250,000)

Other Operating $( 134,615) $( 134,615)

TI $ 50,000 $ 86,635


Other Considerations

• Analysis of limitations and capacity by entity

• Evaluate Small Business Exclusion

• Evaluate impact of grouping elections (212) & common control (Small biz)

• Consider debt restructuring

• Consider lease restructuring

• Corporation with loss – RE LLC with income (vise versa)

• Implication of Qsub/SMLLC vs standalone entity


Questions?


The QBI Deduction Quagmire

Liz Britton & Angi West


How Does This Deduction Work?

• Below the Line!– Not a deduction for AGI

– Not an itemized deduction

• Assuming in highest 37% bracket with full deduction allowed, produces an effective 29.6% Federal rate

• Not a deduction for SE tax

• Same for AMT and regular Tax

• Expires in 2025

• But of course…it is not so simple….


What Will My Deduction Be?

Total of Tentative Deductions for each trade or business (20% of QBI subject to limitations) plus

– 20% of PTP and REIT income

LIMITED TO

20% Taxable Income less

– Net capital gains

– 80% of qualified cooperative dividends


What is a QBI Anyway?

The net amount of qualified items of income, gain, deduction and loss from a qualified trade or business. Does NOT include:

• Trades or business performing services as an employee

• Investment-type income

• ST or LT capital gains or losses

• Wages or guaranteed payments

• Specified Service Traded or Business in certain instances


Specified Service Trade or Business (SSTB)

• Performance of services– Health– Law– Accounting– Actuarial science– Performing arts– Consulting– Financial/brokerage services– Trade or business where principal asset is reputation or

skill of one or more employees

• Services for investment and investment management, trading, or dealing in securities, partnership interests, or commodities


Taxable Income Under $315,000*

Your deduction MAY just be the lesser of 20% of QBI or

20% of Taxable Income!

*Assumes MFJ, threshold is halved for single filers*Will be indexed for inflation


As For Others…


The Others…

• Taxpayers with taxable income over $415,000*– Specified Service Trades or Businesses not eligible

for deduction

– Subject to wage and property limitations

• Taxpayers with taxable income in between…– Limitations phased in based on percentage over

$315K threshold

*Assumes MFJ, threshold is halved for single filers

*Will be indexed for inflation


Step 1 – Compute Initial Deduction

Compute Separately for EACH Trade or Business

– 20% of taxpayer’s QBI with respect to trade or business

– For taxpayers over $315,000/$157,500 threshold, excludes SSTBs


Step 2 – Compute Tentative Deduction

Apply Wage and Property Limitation to EACH Initial Deduction - The 20% deduction of QBI will be limited to the greater of:

– 50% of taxpayer’s share of business’s W-2 wages, or

– Sum of 25% of share of W-2 wages plus 2.5% share of unadjusted basis of qualified property

For taxpayers under $315,000/$157,500 threshold, Wage and Property Limitation DO NOT APPLY


W-2 Wages

• Reasonable compensation reduces QBI– Guaranteed payments reduce QBI but are not

includable in W-2 wage calculation

• Taxpayer’s share of W-2 wages– Special allocations

– Tiered entities

• Limited to wages attributable to QBI– Review allocation for unqualified activities

• Must be reported to SSA– Common paymaster


Qualified Property Is…

Depreciable tangible property is the cost of property which is:• Available for use in qualified trade or business• Used in the production of qualified income during the

year• Depreciable period has not ended before close of year• Depreciable period is the later of:

– 10 years after the placed in service date, or– Last day of applicable recovery period for depreciation

purposes

*Allocated to partners the same way depreciation is allocated


Wage and Property Example – MFJ

No Wages -

Holds Property With Wages

With Wages and

Property

Qualified Business Income 500,000 500,000 500,000

Share of W-2 Wages 0 80,000 80,000

Qualified Property 1,000,000 1,000,000

Taxable Income on 1040 500,000 500,000 500,000

Initial Deduction 100,000 100,000 100,000

50% Wage Limitation 0 40,000 40,000

25% Wage + 2.5% Property Limitation 25,000 20,000 45,000

Tentative Deduction 25,000 40,000 45,000


Entity Comparison – MFJ Below Phase Out

Schedule C

Sole Proprietor

S Corp 100%

owned

Partnership -

99%/1%



Guaranteed Payment - 80,000

W-2 Wages - 80,000 -

Qualified Property 100,000 100,000 100,000


50% Wage Limitation N/A N/A N/A

25% Wage + 2.5% Property Limitation N/A N/A N/A

Tentative Deduction 40,000 24,000 24,000 *

*If no guranteed payment made, same position as Sole Proprietor


Entity Comparison – MFJ Above Phase Out

Schedule C

Sole Proprietor

S Corp 100%

owned

Partnership -

99%/1%

Qualififed Business Income 500,000 375,000 375,000

Guaranteed Payment from LLC - 125,000

Share of W-2 Wages - 125,000 -

Qualified Property 100,000 100,000 100,000



50% Wage Limitation 0 62,500 0

25% Wage + 2.5% Property Limitation 2,500 33,750 2,500



Phase Out: Taxable Income $345,000

$315k $345K $415K


Share of W-2 Wages 80,000 80,000 80,000

Qualified Property 0 1,000,000 1,000,000


50% Wage Limitation 40,000 40,000 40,000

25% Wage + 2.5% Property Limitation 0 45,000 45,000

Reduction in Initial Deduction 0 15,000 0

Phase-In of Reduction (30%) 0 4,500 0



Step 3 – Total Tentative Deductions

QBI Deduction:

• The total of the Tentative Deductions for each trade or business is your potential QBI Deduction

- Be mindful QBI losses reduce deduction

• Potential QBI deduction is limited to 20% of Taxable Income (before deduction) plus capital gains/losses and 80% of qualified cooperative dividends


Loss Limitations

• Net qualified income, gain, deduction, and loss for qualified businesses activities

• If total is less than zero, carryforward loss

• Loss carryforward will offset total potential QBI deduction by 20% in following year


IRS Directed to Issue Guidance on:

• Short years for acquisitions or disposals

• Acquisition of property from related party

• Sale-leasebacks

• Anti-abuse rules for W-2s

• Determining unadjusted basis for like kind exchange or involuntary conversion property


Planning Opportunities

• Defer income and accelerate deductions in 2017

• Examine choice of entity

• Tax planning to fall below $315,000 if subject to limitations

• Revisit reasonable compensation

• Examine business systems as a whole for reallocation opportunities

• Potential grouping planning

• Consider filing separate

• Capitalization planning

• Stay tuned! I am sure we will hear a lot about this!


NOW WASN’T THAT EASY???


AND NOW….


Questions?


CAPITALIZING ON CAPITAL ASSETS

Liz Britton & Angi West


Bonus is back and better than ever!

• 100% immediate expensing

• No limitation on income/assets placed in service

• Now available for used property!!

• Available for assets with a class life of 20 years or less

• May elect out

• 2017 benefit– Eligible for assets purchased an placed in service

after September 27, 2017


Bonus NOT Available for the Following:

• Businesses using floor-plan financing

• Assets acquired in the trade or business of the furnishing or sale of certain utilities

• Assets required to use ADS depreciation


But 100% bonus is not forever….

• Through 12/31/2022 – 100%

• 2023 - 80%

• 2024 - 60%

• 2025 - 40%

• 2026 - 20%

• After 2026 - 0%


Planning Opportunity

Cost Segregation Studies

• Bigger benefits

• Newly constructed and purchased buildings

• Examples on ROI on $5,000,000 purchased building


Cost Segregation Study BEFORE


Cost Segregation Study AFTER


Planning with the QBI Deduction

• If QBI deduction based on property…

– Consider lowering cap threshold

– Elect to capitalize items for tax that you do for book (repairs)

• County and State tax arbitrage

– Increased personal property tax

– Non-conformity state addbacks


We still have 179 Expensing too!

• It is permanent – bonus is not• Limitation increased from $500,000 to $1,000,000• Phase out starting at $2,500,000 for qualified property• Eligible for Qualified Improvement Property placed in

service after 1/1/2018• New non-residential improvements eligible if placed in

service after building and after 1/1/2018:– Roofs– HVAC– Fire protection and alarms– Security systems

• Section 179 retains the $25,000 cap on a deduction claimed on an SUV over 6,000 lbs….but bonus!


What Is Qualified Improvement Property?

• 39 year asset

• Improvement to interior of non-residential real property

• Placed in service after building purchased

• Does not include

– Building Enlargement

– Elevator or Escalator

– Internal Structural Framework


Qualified Improvement Property:

• After Jan 1, 2018, Qualified Improvement Property Replaces:

– Qualified Leasehold Improvement Property

– Qualified Retail Improvement Property

– Qualified Restaurant Property

• Still a 39 year asset…


Qualified Improvement Property Law Glitch

• QIP is 39 year property from 9/27/2017-12/31/2017, eligible for bonus.

• QIP on 1/1/2018 or afterwards is 39 year property, not eligible for bonus.

• We do not think this was the intention! Stay tuned…


Like Kind Exchanges

• Now only for real property NOT held primarily for sale

• Transition rule for personal property exchanges begun before 12/31/17


Questions?


Professional Service Corporations

Tara Theodossis & Christina Sanders


C Corporations and Service Organizations

• Basic C Corporation fundamentals still the same.

– Double taxation

– Service organizations payout income as salaries

– Still flat tax (just different rate)


C Corporations and Service Organizations

• Key Changes

– Elimination of “special” tax rate for PSCs

• From flat 35% to flat 21%

– NOL limitation referred to earlier

• Limited to 80% taxable income

• Impact on year-end planning strategies

– Interest Expense limitation

– 100% expensing of certain purchases


S Corporations and Service Organizations

• Basic S Corporation fundamentals still the same. – Tax compliance at entity level

– Owners generally receive a combination of S Corporation income reported on a K-1 as well as a W-2 with wages.

• Key changes– Interest Expense limitation


– ** Significant change for S Corporation at owner level including Qualified Business Income (QBI) deduction referred to earlier


Partnerships and Service Organizations

• Fundamentals

– Most organized as LLCs

– Several service organizations have real estate in separate LLCs

• Key Changes

– Debate about treatment of rental income as Qualified Business Income (QBI) for flow-through deduction

– Interest Expense limitation



Qualified Business Income (QBI) Deduction

– Let’s Revisit Key Components:

• Unlike most new business provisions – this deduction expires for years beginning after 2025

• 20% deduction on qualifying business income from a partnership, S corporation or sole proprietorship

• QBI is defined as net amount of items of income, gain, deduction and loss with respect to the trade or business. It does NOT include “reasonable compensation” paid to the owner (wages for S Corp. shareholder or guaranteed payment for a partner)

• Other applicable information items…


QBI Deduction and Relationship to Service

Organizations

• 20% Deduction is generally not allowed for business income from “Specified Service Trade or Business”

• This is any trade or business activity involving the performance of services in the fields including health, law, accounting…basically any trade or business where the principal asset of such trade or business is the skill of one or more of its employees or owners EXCEPT architectural or engineering services.

• **HOWEVER – Owners of these business may qualify if their taxable income does not exceed $315,000 for MFJ and $157,000 for others. Phase out is $415,000 for MFJ and $207,500 for others.


QBI Deduction and Relationship to Service

Organizations - Example

QBI Deduction for Service Organizations Under In Between Over

Share of business wages 80,000 80,000 80,000


1040 Taxable Income 315,000 375,000 415,000

QBI Deduction (60,000) (24,000) 0


Issues and Opportunities

• Issues:

– Reasonable Compensation – perhaps even more important now than ever…(FICA and QBI deduction).

– Remember consideration of deduction limitation of net business interest expense for items like new medical equipment financing or new building financing.

– Outside consulting income for individuals


Issues and Opportunities Cont.

• Opportunities:– As previously mentioned and even more critical to

manage taxable income. Opportunities to keep below $315,000 (accelerated depreciation where possible at entity level, timing of individual deductions or married filing separate)?

– Separation of Service and non-Service components?

– What about PSC relationship with Real Estate LLC? Should you consider modification of lease agreements?

– Strategic planning related to interest expense deduction limitation?


Action Item

• Proactive items PSCs can do now:– Physician/owner projections – determine

appropriate w/h and estimates to prevent underpayment

– Consider educating your organizations (owners/docs) – provide opportunities for them to understand how legislation impacts structure, etc.

– Review compensation in S corporations

– Prepare a structure comparison to determine if structural changes are needed

– Start year-end planning earlier


Questions?


Individual Tax Reform

Jed Welmaker and James Baley


Timeline

• Unlike business reforms individual provisions will sunset

• Most changes effective for next eight tax years (2018-2025)


Big Picture


Rate & Bracket Changes


Before/After Comparison


Higher AMT Exemptions/Phaseouts


Capital Gains

• Capital gain rates unchanged

• Top rate:

– 20% (after 478,999 AGI-MFJ)

– 3.8% Net Investment Income Tax

– Plus relevant state tax (NC 5.499% in 2017)


Standard Deduction/Personal Exemptions

• Standard deduction increased to:

– Joint return: $24,000

– Single: $12,000

– Head of household: $18,000

• Personal exemptions:

– Eliminated (would have been $4,150 per person for 2018)


Kiddie Tax

• Children’s income no longer taxed at parents’ rate

• Children must file return to report:

– Earned income at child’s rate (unchanged)

– Unearned income using tax brackets for trusts and estates (previously at parents’ rate)


Child Tax Credit

• Child Tax Credit Increased to $2,000 for each “Qualifying Child” under age 17 (previously $1,000)

• Phaseout thresholds raised:

– $400,000 MFJ (previously $110,000)

– $200,000 Single/HOH/MFS (previously $55-$75k)

• Partially refundable up to $1,400 per child


Education Incentives

• Sec. 529 Plan may distribute up to $10,000 per year for elementary and high school tuition

• Rollover of funds from 529 to ABLE accounts allowed

• Student loan indebtedness discharged for death/disability no longer income


Individual Deductions

• Disallowed:

– 2% miscellaneous itemized deductions:

• Unreimbursed EE business expenses, including EE home office expenses

• Excess deductions on termination of estate/trust

• Misc. deductions flowing from pass-through entities

• Investment fees and expenses (except investment interest – which is still allowed)

• Personal casualty losses (unless federally declared disaster)


Limit for Home Acquisition Indebtedness

• $1 mil. limit reduced to $750,000

– Old limit applies to acquisition indebtedness incurred before 12/15/17

– Second home mortgages still allowed subject to total limit

• Home equity indebtedness – interest deduction eliminated

– Planning tip: to preserve deduction must be used to “substantially improve” the residence


State and Local Taxes

• Limits deduction for state and local taxes to $10,000

• Limit includes all of the following:

– Real property taxes

– Personal property taxes

– Income taxes

• If taxes related to production of income, however, can still deduct on Sched. C, E, or F


Charitable Contributions

• Charitable contribution limit increases to 60% of AGI (was 50%)

• Contributions which include right to purchase tickets no longer deductible (previously 80%)

• Opportunities:– Consider Donor Advised Fund to “bunch” deductions

– Qualified charitable distributions from IRAs still allowed for those at least 70 1/2 (limit $100,000)

– Gift appreciated stock or real estate

– Higher estate exemption – consider income tax vs. estate tax benefits of charitable gifts


Itemized Deductions

• Medical expense subtraction reduced to 7.5% for everyone in 2018 and then back to 10% for everyone in 2019

• No more “Pease Limitation” 3% phase out of itemized deductions

– Had previously reduced most itemized deductions by 3% of income in excess of AGI thresholds (had been $313,800 for MFJ and $261,500 Single)


Above the Line Individual Deductions

• Domestic Production Activities Deduction eliminated

• Alimony and separate maintenance payments no longer deductible and not includable in income of payee

– Effective for divorce or separation agreements executed after 1/1/2019

• No deduction for moving expenses except members of Armed Forces


Excess Business Losses/NOL Changes

• Trade or business losses limited to $500k (MFJ) or $250k (other returns) against wages and other nonbusiness income– Excess over 500/250 limit becomes part of NOL carryover

• NOL– Must carry forward (no longer a carryback option)– Limited to 80% of taxable income without regard to

deduction for NOLs

• Example: $1 mil wages/dividends; 600k sched. C loss in 2018; joint return– 500k of Sch. C loss allowed against $1 mil wage/dividend

income – 100k is excess business loss which becomes NOL carried to

2019


Questions?


Charitable Planning & Exempt Organizations

Amy Bibby & Jeremy Naess


Tax Reform Impact in the Charitable Realm

Multiple Lenses/Perspectives:

• Donor related Provisions

• Exempt Organization Provisions

• Income Tax Provisions

• Employment Tax Provisions


Donor Related Provisions

The adjusted gross income limitation for cash charitable contributions has been increased from 50% to 60% for contributions to public charities

Planning Points:• Donors should be conscious that the increased standard deductions may

impact whether they will itemize on the 1040 and therefore affect the impact that charitable giving has on their tax liability

• Donors who are on the “edge” of being able to itemize may want to consider “bunching” their contributions from multiple years and make the actual distribution in the year that it is helpful to their tax situation

• Donors who are able to itemize should determine which type of giving vehicle offers the best tax impact based on AGI limitations.



The giving vehicle:

Private Foundations Public Charities (DAF)

Total Limit for all annual contributions30% AGI 60% AGI

Tax Deduction for contributions of long-

term appreciated securities FMV up to 20% AGI FMV up to 30% AGI

Tax Deduction for contributions of long-

term appreciated assets and closely held

securities

Cost Basis up to 20% AGI FMV up to 30% AGI

Tax Deduction for Cash ContributionsUp to 30% AGI Up to 60% AGI



The modifications in rules relating to charitable contributions to impact exempt organizations

• With the increase in the standard deductions, fewer

individuals will be able to itemize on their tax returns

leaving less financial incentive to make contributions

• Exempt Organizations likely to feel a direct impact in

resources available to accomplish charitable activities


Exempt Organization Provisions

Excise Tax on Executive Compensation

• For tax years beginning after 12/31/2017 a TE

Organization is subject to a 21% excess tax on the excess compensation paid over 1Million on the top 5 highest paid employees (there is an exclusion for compensation paid in remuneration for medical services by a licensed medical professionals).



Excise Tax on Colleges & Universities• For tax years beginning after 12/31/2017 there

will be a 1.4% excise tax on the net investment income of certain colleges and universities. This applies to colleges / universities with at least 500 students (50% of which are located in the US) and with assets (other than those used directly in carrying out the institutions exempt purpose) that exceed $500,000 per student. The number of students is based on the daily average number of full-time equivalent students.



College Athletic Event Seating Rights• Effective for tax years

beginning after 12/31/2017 a charitable deduction is no longer allowed for contributions made to a college to obtain the right to purchase tickets to an athletic event.



Bonds

• Interest on advance refunding bonds issued after 12/31/2017 will be included in gross income.

• Tax-credit bonds and direct-pay bonds may no longer be issued after 12/31/2017.



Repeal of Individual Mandate Penalty

• Hospitals to manage uninsured population and reporting

• Financial Assistance Policy considerations


Taxable Income Provisions

• UBI Separately Computed for Each Trade or Business: For tax years beginning after 12/31/2017, organizations must be calculate UBI tax liability for each trade or business separately. Losses from one trade or business cannot be used to offset income from another trade or business.

• Net Operating Losses (NOLs): NOLs generated in tax periods

beginning after 12/31/2017 must be tracked separately.NOLs cannot be carried back but can be carried forward indefinitely.

• NOL Deduction limited to 80% of taxable income

• International provision related to transition tax


Taxable Income Provisions

• Certain Fringe Benefits Now Create UBI: Tax Exempt

Organizations providing qualified transportation fringe

benefits, employee parking benefits, and employee use of

on premise athletic facilities could be subject to unrelated business income tax on the value of these benefits.


Employment Tax Provisions

• Moving Expenses: Reimbursements or payment of qualified moving expenses made after 01/01/2018 will not be excludable from taxable income. These items will now be considered additional taxable income.

• Employee Achievement Awards: Bill included clarification/narrowing of the definition surrounding “tangible personal property” in relation to employee achievement awards. Items that might have been historically been treated as tangible personal property (meals, trips, tickets, etc) might not meat the newly provided definition.

• Withholding: IRS issued withholding guidance January 11, 2018. Employers should implement changes by February 15, 2018. IRS is revising the Form W-4 (prior W-4s are based on personal exemptions)


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