CORPORATE TAX UPDATEPresented By:

ERIC WENGER, CPA, MSTPartner | Tax Services Group

Tax and A&A

• General Changes to Rates, AMT and NOLs

• Depreciation Changes

• Business Deduction Changes

Agenda

CHANGES TO RATES, AMT AND NOLs

• Effective for tax years beginning after 2017, C-Corporation tax rate is a flat 21% tax rate.

• Former rates of 34% and 35% are gone.

• C-Corporation provisions are “permanent.”

• The special tax rate on personal service corporations is also being eliminated.

• For fiscal year taxpayers with a tax year ending in 2018, blended rate applies.

Reduction in Tax Rate

• Effective for years beginning after December 31, 2017, corporate AMT is repealed.

• Any AMT credit carryovers to tax years after that date generally could be utilized to the extent of the taxpayer’s regular tax liability (as reduced by certain other credits).

• Additionally, for tax years beginning in 2018, 2019 and 2020, to the extent that AMT credit carryovers exceed regular tax liability (as reduced by certain other credits), 50% of the excess AMT credit carryover will be refundable (in respect to short tax years, this will be prorated).

• Any remaining AMT credit carryover will be fully refundable in 2021.

AMT

2 year Carryback and 20 year Carryforward Elimination:

• NOLs arising from tax years ending before 1/1/2018 are still subject to 2 year carryback, 20 year carryforward rule when used in future. NOLs arising from tax years ending after 12/31/2017 are subject to new rule (no carryback, indefinite carryforward).

• Exceptions: Certain Farming Losses and Insurance Entities may carry back losses up to 2 years.

Examples:

• NOLs arising from a 2017 calendar year entity will still be allowed to be carried back 2 years and only able to be carried forward 20 years since the Tax Year ends before 1/1/2018.

• NOLs arising from fiscal year entity whose year spans over 2017/2018 will be subject to new rule – not allowing any carryback and being able to be carried forward indefinitely since the tax year ends after 12/31/2017.

Modified Net Operating Loss Deduction

80% Limitation Rule:

• NOLs arising in tax years beginning 1/1/2018 and after will be limited to 80% of taxable income.

• Exceptions: The 80% limitation rule does not apply to most Insurance entities.

Examples:

• NOLs arising from either a 2017 calendar year OR a fiscal year tax year spanning 2017/2018 will not be limited to the 80% rule since the beginning of the relevant tax year will have begun before 1/1/2018.

• NOLs arising from 2018 calendar tax years will be subject to the 80% limitation since it began 1/1/2018 and after.

Modified Net Operating Loss Deduction(continued)

• Annual distributions to owners?

• Succession/exit strategy?

• Double layer of tax.

• State considerations.

• §1202 gain exclusion potential.

Choice of Entity Should I switch to a C-Corp?

DEPRECIATION & EXPENSE CHANGES

• Rate changes.

• Acquisition date considerations.

• Applicable for MACRS property having recovery period of 20 years or less.

• Applicable to new and used property.

Bonus Depreciation

Bonus Depreciation

Rate In Service After In Service Before

100% 9/27/2017 1/1/2023

80% 12/31/2022 1/1/2024

60% 12/31/2023 1/1/2025

40% 12/31/2024 1/1/2026

20% 12/31/2025 1/1/2027

0% 12/31/2026

Bonus Depreciation

Placed in Service

Acquired 9/27/20171/1/2017

50% Bonus

Placed in Service

Acquired9/27/20171/1/2017

100% Bonus

Placed in Service after 12/31/2017

Acquired 9/27/20171/1/2017

40% Bonus

• The taxpayer didn’t use the property at any time before acquiring it.

• The taxpayer didn’t acquire the property from a related party.

• The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.

Used Property Eligible for Bonus Depreciation

• Bonus eligibility on used assets makes cost segregation studies of acquired properties more appealing to taxpayers.

• Since used property is now eligible, the personal property and land improvements identified when a building is purchased are also now eligible for bonus depreciation.

• 100% bonus will further front load depreciation deductions from cost segregation studies enabling taxpayers with a larger current year write-off.

• Examination of documents to verify acquisition dates for projects that straddle 9/27/17 will be critical and may impact benefits and fees.

Impact of Bonus Depreciation on Cost Seg.

• Deduction limit increased - $1M.

• Phase-out limit increased - $2.5M.

• Eligible qualified real property definition expanded.

• Exclusion of lodging facility property repealed.

• $25,000 limit on SUVs gets inflation adjustment provision.

§179

§179Per PATH ACT– §179 Per TCJA – §179

Expensing limitation = $500K ($510K for 2017)

Expensing limitation = $1M

Investment limitation = $2M ($2.03M for 2017)

Investment limitation = $2.5M

Qualified Real Property – QLI, QRI, QRP (15-year property)

Qualified Real Property – QIP, Roofs, HVAC, Fire Protection, Alarm &

Security Systems

Property used in connection with lodging does not qualify for §179

Exclusion for property used in connection with lodging is repealed

$25,000 SUV limitation $25,000 limitation is now inflation adjusted

• If a taxpayer does not claim 100% bonus depreciation, the greatest allowable depreciation deduction is:

• $10,000 for the first year,

• $16,000 for the second year,

• $9,600 for the third year, and

• $5,760 for each later taxable year in the recovery period.

• If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is:

• $18,000 for the first year,

• $16,000 for the second year,

• $9,600 for the third year, and

• $5,760 for each later taxable year in the recovery period.

Luxury Automobiles

BUSINESS DEDUCTION CHANGES

• New Rules:

• Disallows interest in excess of 30% of Adjusted Taxable Income (ATI).

• Disallowed interest carries forward indefinitely, to be retested annually.

Interest Limitation

• $25 million or less gross receipts test.

• Aggregation rules.

• Further guidance necessary.

• Certain real estate/farming businesses • ADS election required.

• Regulated utilities.

• Floor plan financing.

Exemptions from Interest Limitation

Definitions

ADJUSTED TAXABLE INCOME

Pre 01/01/2022 Post 12/31/2021

Taxable Income Taxable Income

+ Interest Expense + Interest Expense

- Interest Income - Interest Income

+/- Pass-through items +/- Pass-through items

+/- Non trade or business Items +/- Non trade or business items

+ Depreciation Expense

+ Amortization Expense

• Business Interest – interest paid or accrued on indebtedness allocable to a trade or business.

• Investment interest is NOT included in this definition.

• Note that for C-Corporations ALL interest is business interest.

• Excess Business Income – excess of ATI over business interest.

• Excess Business Interest – excess of business interest over ATI.

Definitions

• The amount of interest allowed as a deduction cannot exceed the SUM of:

• 30% of Adjusted Taxable Income.

• Business interest income.

• Floor plan financing.

• Note that this limitation is applied at the filer level.• For affiliated corporations that file a consolidated return, the

limitation is applied at the consolidated level.

• Disregarded entities do not apply the limitation.

Calculation

• Business interest disallowed under this provision is carried forward indefinitely.

• Treated as paid/accrued in each succeeding tax year until deducted.

• Is only offset by excess income from the SAME ACTIVITY.

• Note that excess limitation (excess business income) is NOT carried forward.

Carryforward (Disallowed Interest)

• Limitation applied at the entity level.

• Carryforwards maintained at the owner level (for flow-

through entities).

• Reported to owners.

• Excess business income is also reported to owners.

• Owners generally cannot net excess business income from one

pass-through entity with carryforward interest from another.

• Excess business income IS added to the owners adjusted

taxable income.

• Basis is immediately decreased for interest expense – regardless

of deductibility.

• Recaptured on sale/disposition.

Pass-Through Application

• Interest expense/income classification:

• Deduction deferral.

• Income and deducting timing rule.

Considerations

Commitment fee Arrangement fee Yield protection payment Market discount

Origination fee Underwriting fee Call premium Original issue discount

Structuring fee Trustee fee Make whole payment Imputed interest

Participation fee Service fee Yield maintenance fee Factoring income

Backstop fee Line of credit fee Consent fee Utilization fee

Attorneys’ fees Ticking fee Amendment fee Exit fee

BUSINESS LOSS LIMITATIONS

• Old Law

• Tax years beginning before 12/31/17.

• No limitation on deductibility of active losses.

• Active losses eligible to offset all income.

• Could create NOLs available for carryforward or carryback.

• Current Law (Tax Cuts and Jobs Act)

• Tax years beginning after 12/31/17.

• “Excess business loss” limited to business income plus threshold amount.

• Active loss limitation computed after passive loss limitations.

• Limited losses become NOLs in subsequent year.

• Subject to new NOL rules.

Old Law vs. Current Law

• Aggregate deductions attributed to trades or businesses over the sum of:

• Aggregate gross income or gain attributed to those trades or businesses, plus

• $250,000 ($500,000 MFJ).

• Threshold is inflation adjusted.

Basic Mechanics

• Melissa starts a business with her best friend Amanda. They form partnership AM, LLC; each contributing $5 million.

• Melissa is married to Bill, who is a doctor.

• Melissa and Bill have the following sources of income and loss for 2018:

• Bill’s W-2 wages of $650,000.

• $750,000 loss allocation from AM, LLC.

• In 2018, Melissa actively participated in the AM, LLC trade or business.

• Do Melissa and Bill have an active loss limitation for 2018?

Active Loss Limitation Example

Active Loss Limitation Example (continued)

(750,000) Aggregate deductions attributable to taxpayers’ trades or businesses

0 Gross income or gain attributable to taxpayers’ trades or businesses

500,000 250k for single, 500k for MFJ

500,000 Maximum active loss deductible

250,000 Excess business loss limitation

500,000 Deductible active loss

• Passive loss limitation is computed before the excess business loss limitation (§469(I)(6)).

• Net passive income is included in excess business loss computation.

Interaction of Passive Losses

• Any excess business loss is carried forward to the next year as an NOL.

• The NOL is subject to the same limitations as other NOLs.

Interaction of NOLs

• For tax years beginning after 12/31/2017, the Domestic Production Activity Deduction (DPAD) no longer applies.

Repeal of DPAD – Sec. 199

• Like-kind exchange rules under Code §1031 now only apply to exchanges of real property.

• Real property must still be held for productive use in a trade or business or for investment to be eligible for like-kind exchange treatment.

• Real property located in the U.S. is not considered like-kind to real property located outside the U.S.

• Applies to exchanges completed after 12/31/17.

Like-Kind Exchange Rules

• Generally, no deduction is allowed for entertainment, amusement or recreation.

• 50% deduction for food & beverage expenses associated with a trade or business is generally still allowed.

• The new law applies the 50% limitation to certain meals provided by an employer that were previously 100% deductible.

Meals & Entertainment - Summary

Entertainment Expenses

Source: CCH Intelliconnect

Meals & Entertainment Deduction Changes

IS SAFE HARBOR THE RIGHT ANSWER?• Evaluate projected 2018 tax liabilities.

State tax answers could differ significantly due to lack of conformity with federal rules.

2018 Estimated Taxes

FOCUSED.ON YOU.ERIC WENGER, CPA, MSTEWenger@rklcpa.com | RKLcpa.com