IN THIS ISSUE Berntson Porter & Company’s mission is to assist its clients in identifying, clarifying and achieving their goals. We accomplish this by caring about our clients’ families and companies as if they were our own.

Principal’s Corner ........1

Client Spotlight.............2

Quality Service is Key ..3

Have Your Employees Completed the New 2018 W-4 Form? ....................3

Preparing for a Change in Revenue Recognition ...................4

Estate Planning and Gifting Under Tax Reform ..........................5

Client News ...................6

DC and State Highlights – The Effects of Tax Reform ..........................7

BP News....................... 11

Summer 2018

PRINCIPAL’S CORNER

As most of you have heard by now, on December 22, 2017 Congress passed the Tax Cuts and Jobs Act, making tax reform a reality.

This tax reform is, by far, the most sweeping tax reform our country has seen in over 30 years. From a tax professional’s perspective, it’s kind of nice – for the first time in 30 years, the tax guy/gal draws the attention at dinner parties. In this Newsletter you will find summary highlights of this sweeping tax reform. While this tax reform was touted as “tax simplification,” I would argue this tax reform is truly anything but “simple.”

As you read through the highlights, you will quickly conclude how complex this tax reform really is. In addition, as this goes to press, this tax reform is riddled with additional questions that need legislative clarification in addition to IRS guidance. This is due, in part, to the lightning speed by which this law was pushed through Congress. Consider this – the last major tax reform this country has seen, prior to this recent reform, was 1986. At that time, it took Congress about 16 months to get that legislation passed through. This tax reform passed in December of last year took less than six weeks to get through Congress: surely there are laws in this reform that require clarification.

What I believe this means for taxpayers is that planning is crucial and the sooner you start planning the better. Going forward, multi-year planning is now even more important given the potential for accelerated/bonus depreciation, interest expense limitations and net operating loss limitations. In addition, the structure of your entity could have an impact on how the new tax reform impacts your taxes. The key is to talk with your tax advisor and start planning now, knowing your taxes are going to be more complex in the future.

David P. Berthon, Jr., CPA, MAcc (Tax), Principal. David can be reached at 425.289.7614 or dberthon@bpcpa.com.

BERNTSON PORTER & COMPANY RECOGNIZED AS A TOP THREE COMPANY TO WORK FOR BY

SEATTLE BUSINESS MAGAZINE!

We’re honored to receive this award celebrating companies that set the standard for executive leadership, benefits, rewards & recognition, corporate culture, training and more.

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Windows, Doors & More (WDM) carries the industry’s leading brands of doors and windows.

For many years, they have offered the Greater Seattle area the highest quality local, national and international products. Today the firm features windows, doors, skylights, glass products, and screens from over 20 manufacturers, showcasing local products such as Milgard Windows, Simpson Doors, Rogue Valley Doors, Marlin Aluminum Windows, as well as products from across the country and around the world like Andersen, Loewen, Velux and Albertini.

WDM opened its first showroom in the historic Ballard community of Seattle in 1993 and grew to multiple locations, including Bellevue, Redmond and Tacoma. In 2009, the firm consolidated all of its sites into their current showroom in the Seattle Design District, where a microcosm of home design and décor companies kindle artistic and technical innovation within their internal culture.

‘It’s an outstanding team,” says owner Rick Locke. “At Windows, Doors & More, customer satisfaction is our primary concern. It is our priority to be available to clients and work collaboratively with them to support their selection of doors and windows for their projects. Everyone at WDM works faithfully to ensure that clients are taken care of and will be pleased with our products and services.”

In order to provide an exceptional customer service experience, Windows Doors & More staffs its showroom with experienced and knowledgeable sales professionals, and has field sales representatives that understand construction and your needs as an architect, contractor or homeowner.

CLIENT SPOTLIGHT

“We met Amy from the Berntson Porter team at the 2014 CougsFirst event and she really stayed in touch, eventually introducing us to BP Principals (and fellow Cougs!) Greg Porter and Dave Berthon,” recalls Rick Locke. “In 2015, we shifted our tax work to the BP team and added their integrated bookkeeping services in 2016. The results have

been pivotal to the success of our growing business. When we put together a team of advisors to acquire additional locations, Berntson Porter was at the top of the list and provided analysis, insight and advice that resulted in a successful acquisition allowing us to double in size.

Windows Doors & More has continued to flourish, having completed its acquisition of Montana Sash & Door last year. The new entity has locations in Coeur d’Alene, Idaho; Bozeman and Kalispell, Montana; and Jackson, Wyoming.

“As our business expands, we will keep relying on the advisors at Berntson Porter,” Rick states. “They truly are best in class accountants and consultants and their expertise in construction and wholesale manufacturing is invaluable. BP’s proactive planning keeps us ahead of the curve. We look forward to growing our partnership in the future.”

Wealth Management

Contact Greg Porterfor this analysis.

Are your investments being managed properly? Are you meeting your financial goals? Let BP Wealth Management “audit” your portfolio and make specific recommendations on how to reduce risk while meeting your goals.

Greg Porter, CPA, MBA, MS (Tax), CVA, MAFFPresident of Berntson Porter Wealth Management, LLCgporter@bpcpa.com or 425.289.7601

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QUALITY SERVICE IS KEY

Quality service is essential to the hospitality industry. Berntson Porter has been committed to providing quality

service to clients in this industry which includes restaurants and bars, hotels, and assisted living facilities. In May, we celebrated the second annual Washington Hospitality Month by launching a formalized practice group for these clients – BP Hospitality.

BP Hospitality is a dedicated group of experts in our office that are focused on helping hospitality clients streamline their financial processes and provide insights and valuable consulting services to navigate the constant changes in government regulations, consumer behaviors, and increasing competition.

Berntson Porter is a member of the Washington Hospitality Association and is committed to understanding current de-velopments and trends affecting the industry. In 2018, there have been a number of government regulations impacting the industry including new federal tax laws, changes in labor laws, and several bills passed during the 2018 Washington state legislative session. A summary of some of the bills passed during the 2018 legislative session include:

� Second Engrossed Fourth Substitute Senate Bill 5251 for a statewide tourism marketing program was passed where .02% of existing sales tax from lodging, car

rentals and restaurants will be directed to attract out-of-state tourists to Washington State. Previously Washington State was one of the only states that did not have a dedicated marketing program.

� Second Substitute House Bill 2015 to modify the King County lodging tax to fund the Washington State Convention Center expansion was passed. The bill removed the lodging excise tax exemption for lodging establishments with fewer than 60 rooms and to tax certain vacation and short-term rentals.

� House Bill 2658 for safer food packaging was passed to eliminate harmful chemicals found in pizza boxes, popcorn bags and other food packaging.

We are excited to continue providing our clients with personal attention and customized solutions to meet specific industry needs. Connect with me to learn more about how BP Hospitality can help you!

Rebecca Young, CPA, MPAcc, Assurance Services Senior Manager. Rebecca can be reached at 425.289.7632 or ryoung@bpcpa.com.

HAVE YOUR EMPLOYEES COMPLETED THE NEW 2018 W-4 FORM?

The IRS provided an updated 2018 W-4 form to assist your employees in determining what the proper withholdings

are based on the tax reform bill. The new tax tables have been implemented but there are other changes in the reform bill that could affect how much withholding should be taken.

The biggest changes to the 2018 Form W-4 are to add the Child Tax Credit and credit for other dependents in the worksheet calculation. In January 2018 the IRS issued updated withholding table amounts to employers to update their payroll systems. Additionally, the withholding rate for supplemental wages dropped from 25% to 22%.

The IRS recommends everyone do the withholding calculator, but especially the following groups, to avoid being under withheld on their 2018 taxes due to the Tax Cuts and Jobs Act of 2017 changes:

� Two income families � People with two or more jobs at the same time � People who only work for part of the year � People with children who claim credits such as the Child

Tax Credit

� People with older dependents, including children age 17 or older

� People who itemized deductions in 2017

� People with high incomes and/or more complex tax returns

With the elimination of personal exemptions, limited itemized deductions and the reduction in the withholding tax tables, it is critical for taxpayers to recalculate their federal withholding. To avoid under-withholding penalties, at least 90% of the taxpayer’s total tax liability must be paid during the year, either through payroll deductions or quarterly estimated tax payments (certain safe harbors apply as well).

The IRS website has a payroll withholding calculator that is quick and easy to use: https://www.irs.gov/individuals/irs-with-holding-calculator. You enter basic info (filing status, salary, estimated itemized amounts, federal income taxes currently being withheld, personal allowances claimed, tax credits entitled

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PREPARING FOR A CHANGE IN REVENUE RECOGNITION

Revenue is a fundamental component for all businesses.

The deadline to implement the new revenue recognition standard is quickly approaching and nonpublic

entities will be required to apply the new standard to annual reporting periods beginning after December 15, 2018. The new principles-based method of accounting includes a complex five step approach to recognizing and disclosing revenue that requires increased judgement and input from management. Planning ahead for the changes in the new revenue recognition standard is paramount for achieving a successful implementa-tion. Listed below are five things you can do to prepare for the new revenue standard:

1. Assemble an implementation team – Determine who should be involved in the implementation process and schedule recurring update meetings. Consider including key members of management that are responsible for oversight of sales, financial reporting, IT, as well as those individuals tasked with setting company policies and procedures.

2. Determine the impact of the new standard on how you recognize revenue – Identify each revenue stream within the business and evaluate each for changes from the previous accounting method. This entails applying the five-step model of revenue recognition. Under the five-step model, management will need to identify each distinct performance obligation which provides a benefit to the customer and is separately identifiable and allocate the transaction price among each of the identified performance obligations. In many cases promised goods or services that were previously treated as one transaction with one price may need to instead be accounted for as separate performance obligations with the total transaction price allocated between each promise. Depending on the result of this exercise, there may be an opportunity to restructure how future contracts are written or products and services are bundled to align business operations with the timing of when revenue is recognized.

3. Assess the impact of the new standard on business processes, policies and internal controls – A new thought process is needed to apply the new revenue standard.

to, etc.) and it tells you how many personal allowances to claim and the estimated amount over or under-withheld for 2018, including adjustment amounts for the rest of 2018.

Employees are not required to submit an updated Form W-4 unless they claimed exemption from federal income tax in 2017 or had a change in status in 2018. Employers are not required to send notices to employees, but are encouraged to have employees check to make sure they are having the correct withholding given the tax changes.

Changes in 2019There will be changes to the 2019 Form W-4 and the instruc-tions. Withholding tables are expected to be released late summer or early fall 2018 to allow payroll software developers enough time to update their software. There is no requirement to obtain a new Form W-4 in 2019, so payroll systems will need to be able to accommodate the allowances claimed in 2018 as well as the calculated amounts used in 2019.

Employee Benefits Changes – Exempt or TaxablePrior to passing the Tax Cuts and Jobs Act of 2017 certain employee benefit were tax exempt to the employee and tax deductible by employers.

Bicycle subsidies: in 2017 employers could provide up to $20 per month in which the employee regularly commutes by bicycle, which was tax exempt to employees. Effective January 1, 2018, any amount provided to an employee for commuting by bicycle to work is now included in their taxable wages.

Achievement Awards (length of service and safety awards): Gifts of tangible personal property continue to qualify as tax-free to the employee, all other qualifications being met. However, awards of cash, cash equivalents, gift cards, gift certificates, vacations, meals, lodging, tickets to theatre or sporting events, stocks, bonds, securities and similar items are taxable to the employee. This was not a change, merely a clarification.

Moving expenses: Effective January 1, 2018, amounts reimbursed to employees for qualified moving expenses are now taxable to the employee with the exception of members of the Armed Forces on active duty pursuant to a military order.

Qualified transportation and commuting fringe benefits (transit passes, qualified parking and transportation vehicle between the employee’s residence and workplace that is paid by the employer): Effective January 1, 2018, these are still excludible up to 2018 monthly limits of $260 for parking and $260 combined transit and vanpool, but no longer deductible by the employer unless necessary for safety purposes.

On-premise athletic facilities: Effective January 1, 2018, these are no longer non-taxable fringe benefits or deductible by the employer.

Susan Pierce, CPA, Senior Manager, Accounting Support and Bookkeeping Services (ASBS).

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ESTATE PLANNING AND GIFTING UNDER TAX REFORM

The Tax Cuts and Jobs Act enacted a temporary doubling of the Federal exemption and Generation Skipping

Tax (GST) exemption amounts for the years 2018 to 2025. Although repeal of estate tax was discussed, it was not adopted. The stepped up cost basis on property transferred at death still remains. While the Federal exemption has increased to $10M per person, adjusted annually for inflation ($11.18M in 2018), the Washington Exemption amount is considerably less at $2M per person, adjusted for inflation ($2.193M in 2018).

It is possible the federal exemption will drop back down to its prior amount after the provisions of the new act sunset in 2025. Moreover, the exemption available to you and your estate is determined in the year of your death, and that is difficult to predict. These unknowns lead to uncertainty in estate planning. However, there are some things that can be done to ensure the best use of the exemption.

Find your gross estate in the chart below and determine if you are in the Washington Estate Planning Zone, Portability

Planning Zone (if married), or Federal Estate Planning Zone.

Based on your gross estate, here are some action items for you to consider as a result of the change in the exemption amounts.

Everyone:Annual exclusion gifts are still advantageous because they remove $15k per year per recipient from your Washington and Federal estates without using any of your lifetime exemption.

Have your will and trust documents reviewed to confirm they have flexibility to allow your estate administrator to best utilize your exemption at whatever amount it is in the year you die. While reviewing your documents, it is an ideal time to determine if any additional updates are needed due to changes in your life, your assets, or the lives of your beneficiaries.

Washington Estate Planning Zone: Washington does not have a gift tax so lifetime gifting can reduce your Washington estate tax liability. However, it is important to consider income taxes before gifting appreciat-ing property. Why? When property is transferred during your lifetime as a gift, the recipient receives the same cost basis in the property that you had. When property is transferred after death, the recipient receives a new cost basis equal to the fair market value on the date of death. On low basis property received as a gift, the recipient will pay higher capital gains tax when appreciated property is sold. Therefore, it may be more advantageous for you to hold the property until death and pay Washington estate tax at a rate of up to 20% instead of the

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As a result, internal business processes, procedures and internal controls will likely need to be modified to ensure that adequate information is captured for recognition of revenue and increased disclosure requirements. Performing a risk assessment is also key in identifying areas subject to management estimate, errors or fraud that could pose a threat to business operations. The implementation team should develop a plan to make the necessary changes to operations, systems, processes and internal controls.

4. Evaluate the tools needed to collect and track information – Additional IT resources may be needed in order to separately track and allocate the transaction price among multiple performance obligations. Existing accounting systems may also need to be modified to capture information needed for the additional financial statement disclosures that will be required upon adoption of the new standard.

5. Consider the other impacts to your business – Tax planning strategies, debt covenant calculations and compensation arrangements all have the potential to be impacted by a change in the way revenue is recognized. Communicate with key business partners (accountants, bankers, insurance brokers, surety, etc.) throughout the implementation process and include them in the discussion on what changes may need to be made to business processes, policies, or outside agreements as a result of the change in the revenue standard.

The implementation of the new revenue standard requires judgement and careful planning. Berntson Porter has many great resources to help you through the implementation process. Contact your BP advisor about how we can help.

Natalia Daniels, CPA, Assurance Services Manager. Natalia can be reached at 425.289.7682 or ndaniels@bpcpa.com

Projected Exemption Amounts

Federal Estate Planning Zone, if married

Portability Planning Zone, if marriedFederal Estate Planning Zone, if single

Washington Estate Planning Zone

$30,000,000

$25,000,000

$20,000,000

$15,000,000

$10,000,000

$5,000,000

$-

— Federal Exemption— Married couple combined federal exemption

— Washington Exemption— Married couple combined Washington exemption

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

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Ensure Your Legacy

Estate Planning is an important element of any business owner’s financial plan. Let us:

• Understand your legacy intent,

• Tailor an estate plan to meet your goals and

• Ensure your plan is structured to perform according to your wishes.

Contact Elizabeth Stephan, Senior Manager and Director of Estate and Transition Planning Services. Elizabeth can be reached at 425.289.7665 or estephan@bpcpa.com.

Estate and Transition Planning

recipient paying a capital gains tax rate of up to 23.8%. The best solution ultimately depends on the asset and your estate goals.

Portability Planning Zone, if married:Portability allows the estate administrator to make an election to transfer a decedent’s exemption amount to the surviving spouse. Assets go directly to the surviving spouse instead of into a Credit Trust. The spouse controls the property whereas in a Credit Trust the residual of the trust gets passed according to the decedent’s will. The advantages are the assets receive a second step up in cost basis when the surviving spouse dies, minimizing capital gains, and the surviving spouse retains flexibility on managing the assets. However, there are disad-vantages with relying on portability for your planning. One example is the decedent’s GST exemption does not transfer to the surviving spouse and is lost. This means a married couple may not be able to pass as many assets down tax free to grandchildren and great grandchildren as they could through more traditional planning. It also gives all control of the assets to the surviving spouse, which may not be ideal in certain situations, such as a second marriage. It also important to note that portability does not apply to the Washington exemption.

If your interest in the portability planning is to ensure the step up at the second death, but you would like to maintain control, your documents can be drafted to trigger a step up while using trusts and is an important option to discuss with your planning advisors.

Estate Planning Zone:Previously used your federal gift and estate exemption but interested in doing more gifting? Now is the time to make those additional gifts. All of the same strategies for gifting (fractional interests, marketability discounts, split interest trusts) are still available. Schedule time with your planning advisors to discuss gifting and planning opportunities that are right for you.

Please contact the Estate and Transition Planning Services group at Berntson Porter for a consultation to discuss your estate situation.

Kristina Hull, CPA, Estate Tax Manager. Kristina can be reached at 425.289.7620 or khull@bpcpa.com.

Top Takeaways � The federal estate exemption has temporarily

doubled to $11.18M per person. This increase is set to expire at the end of 2025. Review your docs now to ensure your plan works under the new exemptions.

� The Washington estate exemption is much lower at $2.193M per person.

� Washington has no gift tax, so lifetime gifting may lower estate tax liability (or get rid of it entirely), however, concern must be given to the capital gains tax.

� Portability allows a married couple to use a deceased spouse’s exemption however, there are disadvantages associated with its use and it should be discussed with your planning advisors.

� Already used your federal gift and estate exemption but interested in doing more gifting? Now is the time.

CLIENT NEWSCongrats to these clients on their recent company an-niversaries: Foushée (40 years) and PSF Mechanical (120 years). Congrats to their outstanding teams!

Both GLY Construction and OAC Services will work on the upcoming expansion of Microsoft’s Redmond headquarters.

Along with Berntson Porter, the following firms were recognized as 2018 top companies to work for by Seattle Business magazine: MG2, OAC Services, Kinetic Sports Rehab and Kalles Group.

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DC AND STATE HIGHLIGHTS Changes and updates to tax laws, regulations and rulings

On December 22, Congress passed the Tax Cuts and Jobs Act, making tax reform a reality. Having taken effect on January 1, 2018, it is important to understand how you and/or your business will be impacted. The following summary highlights major changes for individuals, businesses, international operations, and trusts and estates.

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IndividualsFirst things first: Is your tax liability increasing or decreasing? The answer is not as simple as you might think. Under current law, there are seven tax brackets, with the highest bracket at 39.6%. Under the new law, the seven brackets are retained with the highest being 37%, but your liability may not decrease due to repeal or reduction of certain deductions. There are many provisions that will change the outcome of your tax bill, beginning in 2018.

The bill aims to simplify the filing process for individuals by reducing the number of calculations involved. In order to do this, the deductibility of many items was reduced or eliminated. For example, the deduction for state and local taxes, including state income tax, sales tax, and property tax, has been limited to a maximum of $10,000. The new law also eliminates the deduction for interest on home equity debt and decreases the limit on acquisition debt to $750,000. The deduction for mortgage interest was previously limited to $1 million of acquisition debt plus $100,000 of home equity debt. However, the new law retains the $1 million limit for debt acquired before December 15, 2017. Additionally, the deduction for alimony paid has been repealed and alimony received is no longer taxable income for divorce or separation agreements executed after December 31, 2018. Miscellaneous itemized deductions, such as employee business expenses and investment advisory fees, have also been eliminated.

To offset some of the lost deductions, the new law significantly increases the standard deduction. For married individuals filing jointly, the deduction was increased from $12,700 in 2017 to $24,000 in 2018. For those filing single, the deduction was increased from $6,350 to $12,000. This means that many people who previously itemized their deductions will now benefit from taking the standard deduction and their tax return will be simplified by not having to keep track of their itemized deductions. However, it is also important to note that all personal exemptions are eliminated. You will no longer be able to claim the personal exemption of $4,050 for yourself or any of your dependents.

While many were hoping the Alternative Minimum Tax (AMT) would be repealed, it remains intact for individuals. However, there is a silver lining. The new law temporarily increases the AMT exemption and phase-out amounts for individuals to a level that will prevent the imposition of AMT on most individuals.

The child tax credit is increased to $2,000 and the phase-out income level is increased to $400,000 for married taxpayers filing jointly. In addition, a $500 nonrefundable credit is available for non-child dependents.

The new law will limit the deductibility of net operating losses (NOL). In 2017 there is no limit on NOLs, but under the new law, net operating losses are limited to offsetting a maximum of 80% of taxable income and can no longer be carried back to previous years. However, NOLs can now be carried forward indefinitely. There is an exception that allows a one year carryback of losses related to certain natural disasters.

Considerations for Construction Businesses

� Contractors with average annual gross receipts less than $25M are eligible to use several different accounting methods for long-term contracts entered into after 12/31/17. This threshold was previously $10M.

� New and used assets are now eligible for 100% bonus depreciation, but this does not include assets used by the taxpayer before acquisition, such as equipment that was rented before purchase. These assets are still eligible for Section 179 expense, where the limit has been increased to $1M of expensing with phase-outs beginning at $2.5M of total acquisitions.

� Corporate AMT is eliminated and Individual AMT has increased exemptions and phase-out limits. Contractors with annual gross receipts of over $50 million who did not take advantage of R+D credits in the past due to AMT utilization issues should analyze whether a study now makes sense under the new law.

The effecTs of Tax RefoRm

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Additionally, the amount of pass-through business losses will be limited. This means that business losses that exceed a total of $500,000 if married or $250,000 if single will no longer be deductible in the year the loss is generated. The losses will be carried forward and treated as a net operating loss deductible up to 80% of taxable income in future years. This rule will expire at the end of 2025 and applies to losses passed through from the entity to the owners (e.g. Schedule C business, Schedule E rentals, and Partnership and S corporation K-1s).

Although the new tax law does not directly address The Affordable Care Act, it does repeal the individual insurance mandate. However, the 3.8% Net Investment Income Tax and the 0.9% additional Medicare tax remain.

BusinessesMany businesses will experience major changes when filing their 2018 tax return. The new law reduces the corporate tax rate from a maximum rate of 35% to a flat 21% rate and repeals the corporate AMT. The 21% rate will include personal service corporations. The new law also reduces the dividends received deductions of 80% and 70% to 65% and 50% respectively.

There is a substantial tax benefit given to owners of “pass-through entities,” such as Schedule C sole proprietorships or LLCs, Schedule E rentals (LLC or owned individually), and flow through entities like partnerships and S corporations. The ordinary income (not capital gains or investment income) from these businesses may now be eligible for a deduction of up to 20% of the taxable income from each separate entity. For taxpayers with taxable income under $315,000 for joint, and $157,500 for single, there are no limitations to this deduction and 20% of the ordinary income generated from these activities will avoid income tax. For taxpayers above those income thresholds, there are limitations to the deduction. The deduction is limited to the lesser of 20% of income or 50% of W-2 wages paid by the entity. An alternative to the 50% of W-2 wages test is 25% of W-2 wages and 2.5% of the original cost of depreciable assets used in the business. This will help landlords, who typically use management companies in lieu of employees on payroll. The deduction does not apply to specified service businesses (health, law, accounting, actuarial services, performing arts, consulting, athletics, financial services, brokerage services or any trade of business where the principal asset is the reputation or skill of one or more of its employees) unless taxable income is below the phase-out thresholds, which runs from $315,000 to $415,000 for married filers and $157,500 to $207,500 for singles. These amounts will be adjusted annually for inflation. In the past, architecture and engineering has been considered a personal service business, but for the purposes of this deduction, they are not included as a specified service business and can take this deduction.

Example #1:A construction business operating as an S corporation earns $1M of ordinary taxable income in the year and included in that $1M of profit is $2M of W-2 wages paid to its employees. The deduction would be the lesser of:

1) 20% of $1M net income or $200k2) 50% of $2M of wages or $1M

Since $200k is less than $1M the deduction is $200k. At the top marginal tax rate, the taxpayer would pay tax on $800k of income at the 37% top tax rate, or $296,000. This creates an effective rate of 29.6% on the $1M of taxable income.

Example #2:An LLC earning $1M of net rental income pays zero wages since the LLC uses a management company. The cost of the building, not including land cost, owned by the LLC originally cost $3M. The deduction is the lesser of: � 20% of the $1M net income or $200k

Professional Service Firms: Take Note!

� Section 199A Pass-through Deduction on Qualified Business Income: this is a 20% deduction against qualified business income, creating an effective top tax rate of 29.6% on pass-through income. It’s available to all pass-through entities as well as sole proprietors and personally owned rental properties. More about §199A:o Architects & Engineers qualify for

the 199A deduction!

o For single taxpayers with taxable income in excess of $157,500 and married taxpayers filing jointly with taxable income in excess of $315,000, the deduction is subject to limitations.

o For taxpayers with taxable income in excess of the thresholds noted above, the deduction is not available on income derived from specified service businesses (i.e. any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade of business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees).

� Accounting Method Changes – Cash Basis Accounting: Cash basis method of accounting is available to C-Corps and partnerships with C-Corp partners with up to $25 million in average gross receipts for prior three years. C-Corps with average gross receipts over $25 million must meet the Personal Service Corporation requirements in order to utilize the Cash basis method of accounting.

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Or the greater of: � 50% of wages is $0 � 25% of wages or $0 plus 2.5% of the $3M building or $75k for a total

of $75k

Therefore, you will compare $200k to the greater of $0 or $75k, and the lesser of the two becomes the deduction. In this case, $75k of rental income will avoid income tax.

The law also redefines a “Small Taxpayer.” Prior to the new law passing, the cash method of accounting was only available to C corporations with less than $5 million in average gross receipts and pass-through entities with less than $10 million in average gross receipts. Under the new law, this amount is increased to $25 million – making the cash method available to considerably more businesses. This new threshold also applies to the uniform capitalization rules (263A) for businesses with inventory.

Contractors with average gross receipts under $25 million will also no longer be subject to the percentage of completion rules. In 2017, all contractors with average gross receipts over $10 million are subject to the percentage of completion method. Contractors will still be subject to the percentage of completion rules for AMT purposes.

Businesses will also see a big change to the deductibility of interest expense. In 2017 there is no limit on the amount of interest expense that can be deducted. This will change in 2018. From January 1, 2018, to December 31, 2021, the deduction will be limited to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). Beginning January 1, 2022, the same percentage will apply to earnings before interest and taxes (EBIT). Businesses with less than $25 million gross receipts will be exempt from the limitation and there is also an exception for real estate trades and businesses.

Additionally, the new law allows for 100% bonus depreciation of assets acquired after September 27, 2017. So instead of depreciating assets over several years, businesses will be able to deduct 100% of the cost. Unlike previous law, there is no limit on how much can be deducted and the assets acquired can be new or used. This provision however, will begin to phase out 20% each year beginning in 2023 until it is completely phased out in 2027.

After 2017, the Act eliminates deduction for entertainment, club membership dues or recreation expenses. The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria.

There is also a new law allowing a credit for employers who offer paid family and medical leave. The credit will be between 12.5% and 25% but will expire after 2019. In order to be eligible for the credit, employers must offer at least two weeks paid family and medical leave and the employee must receive at least 50% of their normal wages during their time on leave. Any employee earning more than $72,000 annually will not qualify for the employer credit.

RepealsOne major repeal was the deduction for Domestic Production Activities, which was 9% under the current law. This is significant for manufacturers, contractors, architects, and engineers who relied on the large deduction, but they will be eligible for the 20% business income deduction discussed previously which should be of greater benefit overall.continued on next page

Meals and Entertainment Updates

� Under the new law, entertainment expenses are no longer deductible. Client business meals (provided via an on-premise cafeteria or meals provided to employees who need to be available during meal times) are subject to the 50% limitation. Important: the limitation is limited. For tax years beginning on or after 1/1/2026, these items will not be deductible at all.

� Company social events, such as a holiday party, picnic or outing to a sporting event are still 100% deductible.

� Entertainment-related meals are now treated differently than from client business meals. Companies may need to implement new documentation and procedures to track each meal category separately, thereby identifying the correct deduction amount.

What Does it Mean for Hospitality?

� The Tax Reform Act has brought changes to tax depreciation methods that impact the tax liability for companies in the hospitality industry. The new tax law eliminated the depreciation category for 15-year qualified restaurant property which negatively impacts the tax liability for restaurant owners. Beginning in 2018, buildings are depreciated over 39 years and only certain qualified leasehold improvements will be depreciated over 15 years and be eligible for bonus depreciation.

� Bonus depreciation has been increased from 50% to 100% through 2022 which will help offset the tax liability. Bonus depreciation is also available for used property after September 27, 2017, but is not available if the property was previously leased. Companies may also be able to take advantage of qualified improvement property eligible for Section 179 expensing such as roofs and HVAC.

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Also repealed is the use of like-kind exchanges to defer income on the sale of personal property assets. Real property will still be eligible for like-kind exchange and any exchanges for which there was a binding written agreement prior to December 31, 2017 will be allowed. However, this will not apply if the real property is held primarily available for sale.

Trusts and EstatesEstates and trusts have four new tax brackets with a maximum tax rate of 37%. Previously, the highest tax rate was 39.6% starting with income over $12,400. The estate tax exemption for married taxpayers filing jointly has been increased from $10.98 million to $22.4 million. The exclusion for Washington State is not affected by the new federal law and will be limited to $2,193,000 per person for 2018.

The kiddie tax, which aligns the child’s income tax with the parent’s tax return, still applies. However, instead of waiting for parents to file their return, the new trust rates apply to the child’s income directly and the child will be able to file his or her income tax return prior to his or her parents.

Trusts and estates will also be allowed the 20% deduction, applied in the same manner as pass-through entities.

Additionally, there is a provision in the new law allowing nonresident aliens to be a beneficiary of an electing small business trust. Prior to January 1, 2018, nonresident aliens were precluded from being beneficiaries. This provision is made permanent and will not terminate in 2025.

InternationalThe Tax Reform Act included far-reaching changes to US international tax rules. The Act imposes a one-time deemed repatriation tax on accumulated, untaxed earnings of foreign corporations. Prior to the Tax Reform Act, foreign earnings were generally not subject to U.S. taxation until repatriation of funds. The earnings held as cash or cash equivalents are taxed at 15.5% and all other earnings are taxed at a rate of 8%. A US shareholder may elect to pay its net tax liability on the deemed repatriation in eight installments. This one-time tax applies to domestic entities and US individuals with ownership in foreign corporations.

Overturning a recent court case, the new bill states that a non-US partner in a US partnership is generally considered to be engaged in US trade or business if the partnership is conducting trade or business in the US. Under the new rules, gain or loss from the sale or exchange on or after November 27, 2017 of a partnership interest effectively connected with a US trade or business must be computed as if

Many life insurance companies’ credit ratings are falling off the charts and many policies are now underwater due to poor market performance.

Contact Greg Porter, CPA, MBA, MS (Tax), CVA, MAFFPresident of Berntson Porter Wealth Management, LLCgporter@bpcpa.com or 425.289.7601

Life Insurance Reviews

Let Berntson Porter Insurance Services, LLC perform a no cost, comprehensive review of your current policies and make specific recommendations to protect your family and business.

Key Points for Distributors and Manufacturers

� The Section 199 Domestic Production Activities Deduction (DPAD) has been eliminated. This has been “replaced” by Pass-through Deduction on Qualified Business Income (199A) for pass-through entities. Since many distributors and manufacturers are structured as pass-through entities, it may be tempting to switch to a C-Corporation due to the newly reduced corporate rates. Keep in mind, though, that there are significant benefits that often outweigh the lower C-corporation tax rates that should be considered before making any changes. Bottom line: Any potential changes to structure should be measured carefully and thoroughly vetted.

� Manufacturers with average annual gross receipts of less than $25 million will no longer be subject to the uniform capitalization rules under IRC 263A that require manufacturers to capitalize certain direct and indirect costs to be capitalized as part of inventory (this is an increase from the previous $10 million threshold).

� The Research (R&D) credit is still available to manufacturers – the new law did not alter this credit. Manu-facturers should continue to analyze and document their business activities to take full advantage of this credit.

� The IC-DISC tax incentive for manufacturers that export their products out of the United States remains, but the net potential tax savings are somewhat less due to the new lower tax rates.

� Certain businesses with average annual gross receipts of less than $25 million may wish to consider changing from the accrual to cash method for income tax purposes. However, caution must be exercised with this strategy, as companies still need to stay in compliance with banking covenants and be able to accurately track inventory balances.

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the partnership sold all of its assets at fair market value on the date of transaction. For sales or exchanges after December 31, 2017, the transferee must withhold 10% of the amount realized on the transaction, unless the transferor provides documentation for a domestic individual or entity.

Many new income classifications were included in the bill that affect multi-national corporations. Global intangible low-tax income (GILTI) is one of the new categories of income that ended the deferral of taxation on foreign earnings. Generally, GILTI income is the excess income of foreign subsidiaries over a 10% rate of return on specified tangible business assets. GILTI income is included in the income of US shareholders. A US domestic corporate shareholder will generally be able to take a deduction on the GILTI amount and claim a reduced foreign tax credit. The deduction is 50% of the GILTI amount from 2018 to 2025, limited by the taxable income. Combined with the corporate tax rate of 21%, the effective tax rate for GILTI income for 2018 to 2025 is about 10.5%.

Foreign derived intangible income (FDII) is a new type of income category for US corporations. FDII is generally income from sale of property to a foreign person for foreign use, a license of IP to a foreign person for foreign use, and services provided to a person located outside the US. US corporations are required to include FDII in gross income, but will be allowed a deduction on the FDII. For 2018 to 2025, the deduction is 37.5%.

Foreign property taxes are deductible only when paid or accrued in carrying on a trade or business or for the production of income. Foreign property taxes are not deductible as an itemized deduction.

Important: The individual, estate, and trust provisions will expire at the end of 2025, while the corporate and international laws are permanent.

Overall, new tax legislation, including the Tax Cuts and Jobs Act, provides an opportunity for careful planning and strategic maneuvering. Now more than ever, it is important for individuals and businesses to work closely with knowledgeable tax profes-sionals for optimal results. Please contact your BP advisor to discuss how the new tax law directly impacts you. We’re here to help!

Takeaways for Real Estate Companies

� Lessors of rental real estate will qualify for the 20% Pass-through Deduction due to a late addition to the tax reform legislation, allowing taxpayers to use 2.5% of the unadjusted basis of qualified building property plus 25% of W-2 wages with respect to the business, rather than being restricted to 50% of W-2 wages in the calculation of the “guardrails” the deduction.

� In terms of the pass-through deduction, there is uncertainty for builders and developers that utilize multiple single purpose entities to run their businesses. A strict reading of the new tax code applies the wage and building property limitations on an entity-by-entity basis, which would not allow for aggregation of income and payroll from multiple entities. The IRS is expect to issue additional guidance clarifying this issue in the coming months.

� Business Interest Limitation for Large Companies: Business interest expense in excess of 30% of a business’s adjusted taxable income is disallowed for businesses with average annual gross receipts in excess of $25,000,000, although the limitation does not apply to interest that is capitalized. Businesses can elect out, but cannot take advantage of accelerated depreciation methods.

� Enhanced Depreciation: Bonus Depreciation is eligible for any assets with a depreciable life of 20 years or less, including equipment, most trucks and SUVs, furniture & fixtures, land improvements, interior improvements to nonresidential rental property. Assets acquired after 9/27/17 are eligible for 100% bonus depreciation, regardless of whether the assets are purchased new or used. Taxpayers should be aware that self-constructed buildings and equipment are deemed to be acquired once 10% of the asset’s total costs have been incurred.

� The following building improvements are now also eligible for 179 expense: Roofs, heating, ventilation, air-conditioning, fire protection & alarm systems, and security systems. Interior improvements to nonresidential rental property are also eligible.

� Net Business Loss Limitation: A taxpayer’s net loss from all business activities, after application of the other loss limitation rules, is limited $250,000 for single taxpayers and $500,000 for married taxpayers filing a joint return. Any excess business loss becomes a net operating loss, which is carried forward indefinitely and offsets up to 80% of income in future years.

BP NEWSBP Co-Founder Bob Berntson was recognized for his work on the G400 Practice Advisory Group through the American Institute of Certified Public Accountants (AICPA).

Once again, Berntson Porter was named a top 10 accounting firm in the region by the Puget Sound Business Journal. Go team!

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This newsletter is distributed with the understanding that it is not providing legal, accounting, or other professional advice or opinions on specific acts or matters and, accordingly, no liability is assumed in connection with its use whatsoever.

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