Tax Cut and Jobs Act of 2018 Projection of Effect on Form 1040 fo… · Typical Business Owner Tax...

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Tax Cut and Jobs Act of 2018Projection of Effect on Form 1040

(Sample from the 2017 Small Business Tax Basics Webinar)

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Discussion Agenda1. General

• Complex

• Provisions offset

• Affects employer/employee

• Temporary – NOT permanent

• Changes inflation adjustments

2. Individual• Moving, alimony, exemptions,

AMT, misc. expense eliminated

• Lowers 7 tax rate categories

• Doubles standard deduction

• Doubled estate tax exclusion

3. Businesses• Rate cut 35% to 21%, no AMT

• 20% pass‐through deductions

• Professional ill‐defined

• No loss carry‐back only forward

• Limits interest deductions

• R & D now must be amortized

• Foreign profit repatriation

4. Conclusion• Harder to select corporate entity

• ER – EE relationships changed

• Much still undefined, such as forms redesign

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Presentation Plan• Use a 2017 Sample Net Income

– Schedule C – LLC $46,240

– Form 1065 – Partnership $18,000

– Form 1120S – S Corp $16,000

– Tax Due from Sample Business owner $16,000

• Compare Old and New Sections of Forms

• Separate Individual and Business Changes

• Married Couple for Illustration

• Keep It Simple

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Caveats• Changes are Very Complex

– Covers individuals and corporations

• Last Similar Rewrite, 30 Years Ago

• IRS and Congress Still Digesting for Implementation – Amendments, Forms Design

• Law is Temporary for 10 Years, Not Permanent

• Provisions Offset Like Standard Deduction Up, Exemptions Eliminated

• Affects Employer/Employee Relations, Like Unreimbursed Expenses or Awards

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Typical Business Owner Tax Return Contents

• Form 1040 – U.S. Individual Tax Return

• Schedule A – Itemized Deductions

• Schedule B – Interest and Dividends

• Schedule C – Profit and Loss from Business

• Schedule D – Capital Gains and Losses

• Schedule E – Partnership/S Corp, If Any

• Schedule SE – Self Employment Tax Return

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© 2018 SCORE MN ChaptersAll Rights Reserved 6

Sample’ Form 1040, Tax Return – Page 1

IndicatesSelf-EmployedElements

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AGI - Changes• Moving Expenses – Old Code: If You Moved for Work, Moving Expenses Were Deductible

New Code: No Deduction Except for Military

• Alimony Paid – Old Code: Deductible by Person Paying, and Income to Recipient.

New Code: Not Deductible or Taxable

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Sample Form 1040 – Tax Return, Page 2

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Changes to Adjusted Gross Income• Standard Deduction Doubled from $12,700 to $24,000, or, Option of Itemized Schedule A Deductions, Next Slide

• Eliminates Exemption of $4,050 Per Person, but then Doubled Child Tax Credit to $2,000 Plus New $500 Credit for Other Dependents

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Schedule A – Itemized Deduction Changes

• 7.5% Medical Limit

Ends 1/1/2019

• $10,000 Cap on Taxes

• Mortgage Interest only

on loans to $750,000

• Donations Unchanged

• No Unreimbursed ‘ee

travel, expenses, etc.

• Misc. Deductions

Eliminated

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Other Changes for Individuals• Alternate Tax Threshold Increased from $160,900 to $1 Million for a Married Couple

• Repeal of Obamacare Penalties in 2019

• Allows 529 Savings Accounts for K‐12 Private Tuition and Higher Education

• Raised Estate Tax Exclusion from $5.49 Million to $11.2 Million Per Person

• Inflation Adjustment Tied to Chained CPI Versus CPI and Is Slower to Recognize Increases

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Individual Tax Rate Brackets

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Discussion Shift to Business• Prior Changes for Individuals also Affect Businesses

BUT

• The Following Relate Directly to Business Taxes– C Corporations

– LLCs

– Partnerships

– S Corporations

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Business Tax Rates• C Corporations

– Rate reduced from 35% to 21%

– Alternative Minimum Tax eliminated

• Pass‐Through Entities – Sole Proprietors, Limited Liability Companies, Partnerships and S Corporations– 20% deduction of net income as Form 1040 credit

– Limited by 50% of wages, or 25% of wages plus

2.5% of depreciable assets

– Professional service income eligibility phased out over $315,000 for married couples

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20% Pass-Through Deduction• Form 1040 Adds a New Below the Line Category?

• Due Complexity, Tax Professionals Expect the 20%

Reduction to be Added to Page 2 of Form 1040

• Or, Incorporate into Each Pass‐through Entity form: Schedule C, Form 1065 and 1120S? Or K‐1?

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Other Business Tax Changes -1• Operating Loss – Old: Back 2 and Forward 20 Years

New Law: No Carry Back, Carry Forward Limited

to 80% of Taxable Income

• Research & Development –Was Immediately Deductible, Now Amortized Over Five Years

• Loan Interest – Was No Limit, Now only 30% of Net Income before EBITDA

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Other Business Tax Changes - 2• Entertainment Expenses – Was 50% of Events or 100% to Charitable Events. Now Not Deductible

• Office and Picnics – Still 100% Deductible

• Fringe Benefits –– Employee parking and transit passes now not deductible

– Bike commuting reimbursements deductible

– Employee awards – was up to $400 to $1,600 in any form. New law $ limits stay. But must be tangible personal property (no gift cards, tickets, stocks, coupons, meals, vacations, etc.)

– Meals by employer – not income to employee. But employer can only deduct 50%

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Other Business Tax Changes - 3• Expense 100% of New/Used Equipment

– Reduced in 2023 to 80% and 0% after 2027

• Historic Rehab Credits– Old code paid in first year of expenditure

– New code credits over a 5 year period

• Foreign Profits Repatriation– $2.6 trillion held overseas by U.S. corporations

– Was subject to 35% rate if brought back to U.S.

– New law one time repatriation rate of 15% on cash and 8% illiquid assets like equipment

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Form 1040 - Business Income

Example of

Schedule E to

Recap Pass‐Through

Entity Income

to a Business

Owner’s

Form 1040

Personal Return

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Form 1040-Schedule C

Business Income

Form for Sole

Proprietors and

One Owner LLCs

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Partnership– Form 1065

• Sample based on an LLC• 1065 is different vs

Schedule C• Income is identical• Expense is identical but

grouped differently• Normally NO partner

salaries• Partners can guarantee pay• Reconciles to LLC $46,240• Partners split the “net”

based on % of ownership• K‐1 to each on percentage

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S Corporation – Form 1120S• Sample Based on an LLC• Form is Different vs

Schedule C• Income is Identical• Expenses is Identical but

grouped slightly different• Owners MUST Be Paid• May Pay Retirement Costs

Subject to Limits• Reconciles to LLC $46,240• Owners Get

– W‐2 for salaries paid– K‐1 for share of income

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Sample Partnership Form K-1• Analyzes Components of Income

• Investment type 1065s can have interest, capital gains, etc.

• Can Complicate 1040 Tax Filing

• Partnerships– Splits net income$33,320 x .55% = $18,326

– Assigns guaranteed payments = $12,000

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Results if Effective in 2017• 1040 Example 2017 rates 2018 rates

– Taxable income $73,472 $73,472– Sch. D adjustments ‐ 3,765 ‐ 3,765– 1st bracket @10% ‐18,650 = 1,865 @10% ‐19,050 = 1,905– 2nd bracket @15% ‐51,057 = 7,661 @ 12% ‐50,657 = 6,079– Tax due 9,526 7,984

• 2018 Pass‐Through Effect– Marginal rate above before 20% deduction 50,657– @20% on Schedule C = 0, no salary, on Form 1065

= 3,656*, and on Form 1120S = 5,373* ‐ 9,038* @20% deduction is less than 50% of salaries on Form 1065 and 1120S

– 1st tax bracket @10% on 19,050 1,905– 2nd bracket @ 12% 41,619 = 4,994– Tax due 6,899

• 2018 Total Tax Effect on 2017 Form 1040 Example– 2017 tax $9,526 2018 tax example $6,899 2,627 reduction or 27.%5

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IRS Resources for HELP!

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• The IRS is a Partner– www.irs.gov general website

– Personal 1‐800‐829‐1040

– Business 1‐800‐829‐4933

– Advocate service 1‐877‐777‐4778

• Small Business Topics– www.irs.gov/business/small/index.html

• Tax Videos ‐ www.irsvideo.gov

• CD, Pub. 1065C, Virtual Small Business Tax Workshop


Minnesota Resources for Help

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• Minnesota Revenue is a Partner www.taxes.state.mn.us

• Income Tax: 651‐556‐3781

• Withholding Tax: 651‐282‐9999

• Sales Tax Information: 651‐296‐6181

• MN Unemployment Insurance: 651‐296‐6141

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TurboTax Packages• Personal

• Business Schedule C• Partnerships

• S Corporations

• C Corporations

• Estates and Trusts

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Questions and Answers• Ask Your MN SCORE Chapter Counselor

– www.score‐mn.org

• Contact a Local SCORE Chapter Counselor

– www.score.org/chapters‐map

• SCORE Minnesota Resource

– Use [email protected] for help

– Include zip code, phone and specific questions

• Go to your Chapters website for other workshops,

counseling, roundtables and services.

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Disclaimers

• 2018 Tax Law is Still Undergoing Interpretation

• Contents Are Strictly for Training of Our Clients

• SCORE Minnesota Does Not Endorse Any Vendors or Products

• Screen Shots Are Provided for Illustration Only

• For Other Training or Counseling Contact your Local SCORE Chapter

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Credits• Our Topic Expert for this Webinar Has Been

Virgil Dissmeyer,

SCORE Minneapolis Counselor

• Intuit’s TurboTax for

the Screen Shots

• Veritas Marketing

– Technical Advisor

• SPEDCO – Funding

Sponsor30

Tax Cut and Jobs Act of 2018 Projection of Effect on Form 1040 fo… · Typical Business Owner Tax...

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