Welcome to DHG’s Tax Reform Briefing!
The Tax Cuts and Jobs ActA Discussion of Key Provisions Impacting You
FEBRUARY 7, 2018
• C Corporations
• Accounting Methods
• Impact on Financial Statements
• Other Changes Impacting Businesses
• Impact on Pass-through Entities
• Entity Selection Considerations: S Corp vs. C Corp
• Impact to Individuals
• Charitable Planning and Exempt Organizations
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Tax Reform:
Impacts to CorporationsHaley Roberts, Tax Manager – Federal Tax Specialty Services
• Corporate tax rates
• Fiscal year end filers
• Dividends received deduction
• Corporate AMT
• Net operating losses
• Other miscellaneous corporate and business reforms
• Accounting methods
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HISTORICAL REFORM FOR CORPORATIONS
Corporate Tax Rate
Tax Rate If taxable income is:
21% $0 and more
21% Personal Service Corporation
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Tax Rate If taxable income is:
15% $0 - $50,000
25% $50,001 - $75,000
34% $75,001 - $10,000,000
35% $10,000,000+
35% Personal Service Corporation
2017 Tax Law Tax Reform Law
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Corporate Tax Rate: Fiscal Year End Filers
• Blended rate used for the tax year straddling January 1, 2018
• Calculate two tentative tax liabilities:
- First by applying pre-enactment tax rates to taxable income for the full year
- Second by applying newly enacted tax rates to taxable income for the full year
• Each tentative tax is pro rated based on number of days
• Tax for the full year is the sum of the proportion of each tentative tax
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Corporate Tax Rate: Fiscal Year End Filers
EXAMPLE
• Fiscal year ending 4/30/2018
• Taxable income for period 5/1/2017 through 4/30/2018 is $1,000,000
• Effective date of corporate tax rate change is 1/1/2018
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Tentative Tax One:
Taxable Income $1,000,000
Pre-enactment Tax Rate 35%
Tentative Tax Liability One $350,000
Tentative Tax Two:
Taxable Income $1,000,000
Post-enactment Tax Rate 21%
Tentative Tax Liability Two $210,000
Total Tax Liability for FYE 4/30/2018:
2017— 245 / 365 of $350,000 $235,000
2018— 120 / 365 of $210,000 69,000
Total Tax Liability FYE 4/30/2018 $304,000
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Corporate Dividends Received Deduction
Deduction % Ownership %
80% 20% or more ownership
70% Less than 20% ownership
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Deduction % Ownership %
65% 20% or more ownership
50% Less than 20% ownership
2017 Tax Law Tax Reform Law
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Corporate AMT
• Corporations subject to a
Corporate AMT much like
individuals
• AMT calculation could have
created credit carryovers
• Corporate AMT repealed
beginning after December 31,
2017
• Any remaining AMT credit
carryovers may be utilized to
the extent of regular tax liability
• For 2018, 2019 and 2020, to
the extent they exceed regular
tax, 50% of excess carryovers
are refundable, with the
balance refunded in 2021
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2017 Tax Law Tax Reform Law
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Net Operating Losses
• NOLs applied 100% against
current year taxable income
(90% for AMT)
• 2 year optional carryback of
excess NOL’s
• 20 year carryforward of excess
NOL’s
• Limits NOL deduction to 80% of
taxable income for NOLs
created after 2017
• Repeals the carryback provision
• Indefinite carryforward of NOLs
• New provision applies to losses
arising in tax years ending after
December 31, 2017
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2017 Tax Law Tax Reform Law
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Example: NOL & AMT Credit Carryforwards
FACTS
• Corporate Taxpayer with calendar year end
• AMT Credit Carryforward at December 31, 2017: $100
• Taxable Income / (Loss) as follows:
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2017 2018 2019 2020 2021
($1,500) ($4,000) $1,000 $3,000 $1,500
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Example: NOL & AMT Credit Carryforwards
• 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
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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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Example: NOL & AMT Credit Carryforwards
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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
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• Business interest expense
• Domestic production activity deduction (DPAD)
• Like-kind exchange
• Special rule for taxable year of inclusion
• Deduction for certain fines, penalties, and other amounts
• Local lobbying expense
• Business credits
• Other miscellaneous business provisions
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MISCELLANEOUS CORPORATE AND BUSINESS PROVISIONS
Business Interest Expense
• Business interest expense is generally
deductible, subject to certain
limitations
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2017 Tax Law Tax Reform Law• Limits the deduction of business interest
expense in excess of:
- Business interest income, plus
- 30% of business adjusted taxable
income, plus
- Floor plan financing interest
• Any disallowed interest expense is carried
forward indefinitely
• Does not apply to floor-plan financing
interest
• Defined formula for adjusted taxable income
• Defined business interest expense and
business interest income
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Domestic Production Activity Deduction (DPAD)
• Certain businesses that have
Domestic Production Activity
(as defined in section 199) may
be able to claim a deduction no
greater than:
- 9% of Domestic Production
Activity Income
- 9% of W-2 wages
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2017 Tax Law Tax Reform Law
• The deduction for domestic
production activities provided
under section 199 is repealed
• Note: If a company was taking a
9% DPAD deduction and they
now claim the 20% pass-
through deduction, the marginal
benefit of the pass-through
deduction is only 11%
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2017 Tax Law Tax Reform Law
Like-Kind Exchanges
• Section 1031 allows for the “roll-
over” exchange of like real
property, tangible personal
property, and intangible property
• Section 1031 still allowed for like-
kind real property
• Section 1031 disallowed for
tangible personal property and
intangible property
• Transition rules are applied and
still need to be defined by the
Secretary
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Special Rule for Taxable Year of Inclusion
• The “all events” test is satisfied no later
than when an amount is recognized as
revenue in the taxpayer’s applicable
financial statements
• Advance payments received must be
recognized as taxable revenue no later
than the end of the tax year following the
year of receipt
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• Under §451, an accrual method taxpayer
includes an amount in taxable income when
“all events” have occurred which fix the
taxpayer’s right to receive the income and
the amount can be determined with
reasonable accuracy
• “All events” have occurred at the earliest
time when one of the following occurs:
- An amount is received;
- The taxpayer has the right to bill an
amount; or
- The amount is earned
• Possible that all events have not occurred
until after an amount is recognized for
financial reporting purposes
2017 Tax Law Tax Reform Law
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Special Rule for Taxable Year of Inclusion: Example 1
FACTS
• XYZ Corporation (an accrual method taxpayer) is awarded a contract worth $2,000,000 to
develop an advanced software program which will allow humans to translate dolphin-speak into
common English
- The contract is for services and does not meet the definition of a “long-term contract”
• XYZ estimates the program will cost $1,600,000 to complete (a 25% profit margin)
• Stipulations of the contract:
- Payment is not due to XYZ until the successful demonstration of the final software program’s
capabilities
- XYZ corporation will not be paid for any work done if the program is not completed or fails to
perform as specified
- The program must understand all documented species of ocean and river dolphin
• On its applicable financial statements, XYZ recognizes revenue equal to 125% of costs as costs
are incurred
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Special Rule for Taxable Year of Inclusion: Example 1
FACTS (cont.)
• The program is still in its nascent stages at the end of Year One and is
non-functional
• By the end of Year Two, the program understands common bottlenose
dolphins but not Amazon River dolphins
• The program is completed, successfully tested, and demonstrated to the
customer’s satisfaction during Year Three
• XYZ invoices the customer for the full contract price during Year Three but
does not receive payment until Year Four
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Special Rule for Taxable Year of Inclusion: Example 1
• Same as 2017 tax law with one
new addition…
• The “all events test” is met no later
than when the amount is
recognized as revenue in the
taxpayer’s applicable financial
statements
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• Income is generally recognized
only when the “all events test” is
met – which occurs at the earliest
of:
(1) when payment is received,
(2) when entitled to invoice for
work done, or
(3) when the amount is earned
(e.g., when the work is
complete)
2017 Tax Law Tax Reform Law
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Special Rule for Taxable Year of Inclusion: Example 1
Year One Year Two Year Three Year Four Total
Amount Received $ - $ - $ - $2,000,000 $2,000,000
Right to Bill Amount $ - $ - $2,000,000 $ - $2,000,000
Income Earned No No Yes Yes (Year 3)
All Events Test Met? No No Yes Yes (Year 3)
Revenue per AFS $800,000 $500,000 $700,000 $ - $2,000,000
Taxable Revenue
Pre-Reform Law $ - $ - $2,000,000 $ - $2,000,000
Post-Reform Law $800,000 $500,000 $700,000 $ - $2,000,000
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Special Rule for Taxable Year of Inclusion: Example 2
ADVANCE PAYMENTS UNDER §1.451-5
• ABC Co. is an accrual method taxpayer
• In Year 1, ABC receives a customer payment of $5,000 toward the
$15,000 purchase price for electric motors to be provided in Year 3
• ABC follows Treasury Regulation §1.451-5, which allows a taxpayer
to defer recognition of certain advance payments for goods until the
taxable year in which properly accruable under its method of
accounting
• ABC does not meet the all events test for this contract until Year 3
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Special Rule for Taxable Year of Inclusion: Example 2
Year One Year Two Year Three Total
Amount Received $5,000 $ - $10,000 $15,000
All Events Test Met? No No Yes
Revenue per AFS $ - $ - $15,000 $15,000
Taxable Revenue
Pre-Reform Law $ - $ - $15,000 $15,000
Post-Reform Law $ - $5,000 $10,000 $15,000
ADVANCE PAYMENTS UNDER §1.451-5
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Deduction for Fines and Penalties
• Amounts paid to, or at the direction of,
a government or governmental entity
for violation of a law are non-
deductible
• Also applies to amounts paid to
investigate any such potential
violation
• Does not apply to amounts paid:
- As restitution/remediation for
violation of the law
- To come into compliance with
violated law; or
- As restitution for failure to pay
otherwise deductible taxes25
• Amounts paid to any government or
government agency for violations of
law are non-deductible
2017 Tax Law Tax Reform Law
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Local Lobbying Expenses
• No deduction will be
allowed for lobbying
expenses with respect to
legislation before local
government bodies.
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• Exception to general rule
disallowing a deduction
for lobbying expenses for
lobbying on legislation
before local government
bodies
2017 Tax Law Tax Reform Law
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Business Credits
• Orphan Drug Credit – credit
available equal to 50% of qualified
clinical testing expenses related to
drugs for rare diseases or
conditions.
• Rehabilitation Credit (Historical
Structures) – 10% credit of
qualified rehabilitation expenditures
with respect to any qualified
rehabilitated building; Increased to
20% for expenditures related to
certified historic buildings.
• Orphan Drug Credit – the amount
of credit is reduced to 25% of
qualified clinical testing expenses
• Rehabilitation Credit –
- 10% credit for qualified
rehabilitated buildings is
eliminated
- 20% credit remains on certified
historic buildings
- Credit must be claimed ratably
over five years
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2017 Tax Law Tax Reform Law
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Business Credits (cont.)
• Employer credit for paid family and medical
leave – no credit existed in 2017
• Tax credit bonds – Taxpayers holding certain
bonds would receive tax credits in lieu of
interest payments from bond issuers.
• Employer credit for paid family and medical
leave –
- Eligible employers my claim a credit equal
to 12.5% of paid leave paid to qualifying
employees.
- Credit is increased by 0.25% for each
percentage point that wages paid during
qualifying leave exceeds 50% of the
wages normally paid to the employee.
- Maximum credit of 25%
• Tax credit bonds –
- Repealed; No new issuances after
12/31/2017
- Current holders of bonds issued prior to
12/31/2017 will continue to receive credits
2017 Tax Law Tax Reform Law
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Accounting Methods: Small Business Reforms
• Expands availability of cash method of accounting to certain
taxpayers
• Expands exemption from requirement to account for inventories
and to apply UNICAP for certain taxpayers
• Expands exemption from requirement to use the percentage-of-
completion method for small contractors
• Modification of rules under §179
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Small Business: Overall Cash Method of Accounting
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• Corporations and partnerships with corporate partners are prohibited from using
the cash method of accounting unless their average gross receipts for the prior
three taxable years is less than $5 million
- This test must be satisfied for each of the taxpayer's tax years beginning after
December 31, 1985
• Farming corporations are generally prohibited from using the cash method of
accounting if annual gross receipts exceed $1 million
• Closely-held and family-owned farming businesses are permitted to use the cash
method if average gross receipts do not exceed $25 million
• Qualified personal service corporations are generally permitted to use the cash
method regardless of gross receipts.
2017 Tax Law
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Tax Reform Law
Small Business: Overall Cash Method of Accounting (cont.)
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• All taxpayers (other than tax shelters) with 3-year average gross receipts
less than $25 million (indexed for inflation) are permitted to use the cash
method of accounting
• Application of this provision constitutes a change in method of accounting
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Small Business: Overall Cash Method of Accounting (cont.)
• Factors to consider when evaluating overall cash method:
- May be beneficial when Accounts Receivable are higher than Accounts
Payable (allows taxpayer to defer income)
- More flexibility with regard to timing of taxable income recognition
(taxpayer can write checks at end of the year or bill clients soon after
the close of the year to control expenses and income)
- Reduced administrative burden - assuming the taxpayer does not have
GAAP accrual-basis financial statements
- Gives a better indication of cash on hand
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2017 Tax Law
Small Business: Inventories
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• Any business in which the production, purchase, or sale of merchandise is a
material income-producing factor must generally account for inventories at the
beginning and ending of each year
• Affected businesses must also use the accrual method of accounting for
purchases and sales of inventory
• Taxpayers in qualifying trades or businesses may account for inventory as
materials and supplies that are not incidental if average gross receipts for the
prior three taxable years does not exceed $10 million
- Must not otherwise be prohibited from using the cash method as overall
method of accounting under §448
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Tax Reform Law
Small Business: Inventories (cont.)
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• All taxpayers (other than tax shelters) with 3-year average gross
receipts less than $25 million (indexed for inflation) are exempt from the
requirement to account for inventories
• Eligible taxpayers may either treat inventories as materials and supplies
that are not incidental or conform to the taxpayer’s financial accounting
treatment
- Non-incidental materials and supplies are deducted as consumed or
utilized in the taxpayer’s operations
• Application of this provision constitutes a change in method of
accounting
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Small Business: Inventories Example
FACTS
• Corporate Taxpayer producing wooden canoes
• Average annual gross receipts: $20M
• Annual purchases are fully consumed during the year of purchase – but
20% remains on-hand in the form of canoes in process
• Annual wood purchases as follows:
Year 1 Year 2 Year 3
$7,000,000 $9,000,000 $8,000,000
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Small Business: Inventories Example
• Accounting for inventory under accrual method:
• Accounting for inventory as non-incidental materials and supplies
Year 1 Year 2 Year 3
(A) Beginning Inventory $ - $1,400,000 $1,800,000
(B) Purchases 7,000,000 9,000,000 8,000,000
(C) Ending Inventory (20% of Purchases) 1,400,000 1,800,000 1,600,000
Cost of Goods Sold (A) + (B) – (C) $5,600,000 $8,600,000 $8,200,000
Year 1 Year 2 Year 3
Purchases $7,000,000 $9,000,000 $8,000,000
Consumed (100% of Purchases) 7,000,000 9,000,000 8,000,000
Cost of Goods Sold = Amount Consumed $7,000,000 $9,000,000 $8,000,000
Difference in Taxable Income
(Compared to accrual method)($1,400,000) ($400,000) $200,000
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Small Business: UNICAP
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• Taxpayers must capitalize certain direct and indirect costs related
to real or tangible property, whether produced or acquired for
resale
• Qualifying resellers whose average annual gross receipts do not
exceed $10,000,000 are generally exempt from these
requirement with respect to personal property acquired for resale
• Other taxpayers may be exempt from the requirements of IRC
263A based on certain industry classification or other limited
exceptions
2017 Tax Law
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Tax Reform Law
Small Business: UNICAP (cont.)
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• All taxpayers (other than tax shelters) with 3-year
average gross receipts less than $25 million (indexed for
inflation) are exempt from the capitalization rules of IRC
263A
• Application of this provision constitutes a change in
method of accounting
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Small Business: Long-Term Contract Accounting (IRC 460)
• Gross receipts threshold amount
is increased to $25 million for all
taxpayers (other than tax shelters)
• Application of this provision
constitutes a change in method of
accounting
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• Taxpayers with average gross
receipts of less than $10 million for
the three prior taxable years are
exempt from the requirement to
use the percentage-of-completion
method of accounting for long-
term construction contracts which
are expected to be completed
within two years of the date when
related costs are first incurred
2017 Tax Law Tax Reform Law
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Other Accounting Methods Opportunities
• Even though many of these provisions are not effective
until 2018, taxpayers should explore opportunities to
accelerate deductions into to 2017 and defer income into
2018
• Not just timing! Will result in permanent tax savings
due to lowering of income tax rate
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Creating Value Through Deferral
EXAMPLE
Taxpayer recognizes revenue ratably as work is performed. Taxpayer changes its method to
recognize revenue when earned (e.g., when work is complete or product is delivered).
Taxpayer projects steady business activity and revenue going forward.
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Year 1 Year 2 Year 3 Years 4-10 Total Final Year
Current Method 1,000 1,000 1,000 7,000 10,000 -
New Method 750 750 750 5,250 7,500 -
Recognize PY Deferral - 250 250 1,750 2,250 250
Total 750 1,000 1,000 7,000 9,750 250
Difference (250) - - - (250) 250
Tax Savings @ 35% (88) - - - (88) 88
Note: Example does not take into account IRR on cash tax savings. The
opportunity to generate significant benefit is greater than illustrated here! Return to Table of Contents
Creating Value Through Deferral
EXAMPLE
Same facts, but assume tax rate is 35% in Year 1 and is reduced to 21% in Year 2 and beyond.
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Year 1 Year 2 Year 3 Years 4-10 Total Final Year
Current Method 1,000 1,000 1,000 7,000 10,000 -
35% 21% 21% 21% 21%
350 210 210 1,470 2,240 -
New Method 750 750 750 5,250 7,500 -
Recognize PY Deferral 0 250 250 1,750 2,250 250
Total 750 1,000 1,000 7,000 9,750 250
35% 21% 21% 21% 21%
263 210 210 1,470 2,153 53
Annual Tax Savings 88 - - - 88 (53)
Permanent Tax Savings 35
Note: Example does not take into account IRR on cash tax savings. The
opportunity to generate significant benefit is greater than illustrated here!Return to Table of Contents
Other Accounting Methods Opportunities
• Automatic method changes may be made effective for 2017 through the
date the 2017 tax return is filed (including extensions)
- Overall accrual to cash
- Prepaid maintenance, service or insurance contracts
- Cost segregation studies
- Accrued expenses – fixed and determinable
• We are still awaiting guidance on the procedures for adopting new
accounting methods provided in the tax reform legislation
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Tax Reform: Impact on
Financial StatementsJeremy Betsill, Assurance Partner
Tax Reform Headlines
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Tax Reform Headlines
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• Enacted date vs. effective date
• Re-measurement of deferred taxes
• International tax considerations
FINANCIAL STATEMENT CONSIDERATIONS
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Enacted Date vs Effective Date
DEFINITIONS
• Enacted
- The date the legislation is signed into law
• Effective
- The date the legislation (law) takes effect
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Enacted Date vs Effective Date
“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
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ASC 740: Enacted Date vs. Effective Date
• “The effect of a change in tax laws or rates shall be recognized at the
date of enactment.”
• Implications:
- Current taxes will remain under OLD tax regulations for 2017 since
new law not effective until January 1, 2018.
- However, deferred tax assets and liabilities shall be adjusted for the
effect of a change in tax laws or rates in the period enacted (i.e. 2017).
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Current vs Deferred Taxes
• Current Taxes –tax effects that are taxable or deductible in the
current reporting period.
• Deferred Taxes - tax effects that will lead to taxable income or
tax deductions in future periods.
- GAAP requires deferred tax liability or asset to be recognized for the estimated future tax effects attributable to temporary differences and carryforwards.
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Fiscal Year Ends (non-calendar)
• If a law is enacted subsequent to the balance sheet date but
prior to issuance of the financial statements, it is considered a
non-recognized subsequent event
• Example:
- Legislation enacted December 22, 2017 would be a non-
recognized subsequent event for a corporation with a
November 30th fiscal year end
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Re-measurement of Deferred Taxes
• Applies to C-corporations, pass-through entities (S-corps, LLC, etc.) are
generally not subject to tax at the entity level
• Corporate rate of 21% for deferred tax assets and liabilities expected to
reverse after 12/31/2017
• Blended statutory tax rate for fiscal year taxpayers
- Portion of year at 35%, portion at 21%
• Reduced federal benefit 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
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Re-measurement of Deferred Taxes (cont.)
MECHANICS OF RE-MEASUREMENT AT DATE OF ENACTMENT
• Obtain U.S. deferred tax balances as of enactment date
- In practice, one may expect to use 12/31/2017 balances as
that may be the best information available
• Schedule the reversal of the deferred tax balances in the future
• Re-measure effect of temporary differences and carryforwards at
new corporate tax rate of 21%.
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Re-measurement of Deferred Taxes (cont.)
• Rate change may result in disproportionate tax effects being
lodged in OCI
- Could apply to various other items that are accounted for
through OCI, such as unrealized gains or losses derived from
pensions, currency translation, available-for-sale securities,
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.
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Re-measurement of Deferred Taxes – Example
Reduction of DTA = $140,000 charged to earnings through deferred tax expense
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OLD Rate Tax Reform
NOL carryforward $1,000,000 $1,000,000
Tax rate 35% 21%
Deferred tax asset $350,000 $210,000
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Net Operating Loss DTA Considerations
• Applicable for NOLs generated after 1/1/2018
• NOL utilization limited to 80% of taxable income
• NOL carrybacks eliminated
• NOL carryforward period is indefinite
• Note: NOL changes to be considered in ability to utilize NOL
carryforwards and need for valuation allowance
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Multinational Considerations
• New law creates one-time transition tax on undistributed foreign earnings (since 1986)
• “Unremitted Foreign Earnings” is a GAAP concept, based on book earnings
• “Earnings and Profits” (E&P) is a tax concept, based on U.S. tax rules
• Caution:
- In practice, the two above measures often vary by only an immaterial amount and differences between the two are often disregarded for ease of computation
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One-Time Transition Tax – Deemed Repatriation
• One-time transition tax on accumulated foreign earnings (E&P)
• Cash and Cash Equivalents taxed at 15.5%
• Operating Assets taxed at 8%
• Tax recorded in graduated installments over 8 years
- Record tax payable balance as of 12/31/2017
- Consider classification as current vs. non-current payable due
to 8-year payment period.
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SEC Implementation Guidance
• SEC guidance provides a “measurement period” for issuers to
evaluate the impacts of tax reform on their financial statements
• Measurement period not to extend beyond one year from the
enactment date
• During the measurement period, the SEC Staff expect that
entities will be acting in good faith to complete the accounting
under ASC Topic 740
• Applies to publicly traded companies, may be used as guideline
for privately-held companies
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Other Changes Impacting Businesses
• Cost Recovery
• Limitation on Deduction of Interest
• Meals and Entertainment Expenses
• State Tax Conformity
• International Implications
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OTHER CHANGES IMPACTING BUSINESSES
Other Changes Impacting Businesses:
Cost RecoveryRachel Nightengale, Tax Manager
• Increased expensing
- Bonus depreciation
- Section 179 expensing
• Changes to recovery periods for real property
• Modifications to depreciation limitations on luxury automobiles and
personal use property
• Research and experimental expenses
• Planning considerations
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COST RECOVERY
Bonus Depreciation
• Allows a 50% bonus depreciation deduction for first year placed in service
• Applies to new property only
• Not limited to taxable income of the entity
• Qualified property includes property with a MACRS life of 20 years or less
• Qualified property includes:
- Property with a MACRS life of 20 years or less
- Qualified leasehold improvement property
- Certain qualified restaurant property
- Certain qualified retail improvement property
- Limitations apply to self rental or owner occupied property
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2017 Tax Law
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Bonus Depreciation (cont.)
• Allows a 100% bonus depreciation deduction for first year placed in
service
• Applies to new and used property
• Not limited to taxable income of the entity
• Qualified property - Technical issues discussed later
• Applies to property acquired and placed in service after September 27,
2017, subject to binding contract rules
• Phased down by 20% each year beginning in 2023 until completely
phased on in 2027
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Tax Reform Law
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Bonus Depreciation – Binding Contracts
• Eligible property must be both acquired and placed in service after 9/27/2017
• Eligible property is considered acquired after 9/27/2017 only if there was not a written binding
contract prior to the acquisition date
• Requirements of a binding contract:
- Enforceable under state law
- Does not limit damages to a specified amount
- Any conditions are not within control of either party
- Any changes to conditions are insubstantial
- Supply agreements must include the amount and design specifications of the purchase to
be binding
- Purchasing a component or components of a larger asset is not considered a binding
agreement to purchase the larger asset
• Note: An option to buy property is not considered a binding contract
67Return to Table of Contents
Bonus Depreciation – Effective Dates and Allowances
68
Date Applicable Percentage
Acquired before Sept. 27, 2017 50%
Acquired and placed in service after Sept. 27, 2017, and before January 1, 2023 100%
Acquired and placed in service after Sept. 27, 2017, and before Dec. 31, 2022
with an election made to use 50% rather than 100%50%
Acquired after December 31, 2022, and PIS in before January 1, 2024 80%
Acquired after December 31, 2023, and PIS in before January 1, 2025 60%
Acquired after December 31, 2024, and PIS before January 1, 2026 40%
Acquired after December 31, 2025, and PIS before January 1, 2027 20%
PIS on or after January 1, 2027 0%
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Applicable Recovery Period for Qualified Improvement Property
• Eliminates the 15 year recovery period for qualified leasehold improvement property,
qualified restaurant property, and qualified retail improvement property – effective 1/1/2018
• Eliminates qualified improvement property from the definition of eligible bonus depreciation
property – effective 1/1/2018
• Congress intended to – but DID NOT – provide a single 15-year recovery period for
qualified improvement property
• Qualified Improvement Property - certain interior improvements to nonresidential real
property placed in service after the initial placed-in-service date of the property
• Starting in 2018, qualified improvement property is depreciated over 39 (MACRS) and 40
(ADS) years, generally not eligible for 100% expensing
• ADS recovery period for residential rental property is reduced from 40 to 30 years
69
Tax Reform Law
Return to Table of Contents
Section 179 Expensing Election
• Maximum amount that may be deducted is $500,000 (indexed for inflation – 2017
deduction is $510,000)
• Partial phase-out of deduction if more than $2,000,000 of section 179 eligible property
is acquired during the tax year (indexed for inflation – 2017 limitation is $2,030,000)
• Deduction fully phased out if purchases of section 179 eligible property exceeds
$2,500,000 ($2,540,000 for 2017)
• Deduction limited to taxable income
• Amount of deduction disallowed due to taxable income limitation may carried forward
indefinitely
• Deduction for Sport Utility Vehicles capped at $25,000
• Expense election limited to 1245 property
• Available for new or used property
70
2017 Tax Law
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Section 179 Expensing Election (cont.)
• Maximum amount that may be deducted is $1,000,000 (indexed for
inflation after 2018)
• Partial phase-out of deduction if more than $2,500,000 of section 179
eligible property is acquired during the tax year (indexed for inflation
after 2018)
• Deduction fully phased out if purchases of section 179 eligible
property exceeds $3,500,000
• Deduction limited to taxable income
• Amount of deduction disallowed due to taxable income limitation may
carried forward indefinitely
71
Tax Reform Law
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Section 179 Expensing Election (cont.)
• Deduction for Sport Utility Vehicles remained capped at $25,000 but
will be indexed for inflation after 2018
• Expands expensing election to:
- Furnishing lodging property – hospitality and apartment buildings
- Roofs, HVAC property, fire protection, alarm and security systems
(only applies to nonresidential real property under expansion or
improvement, placed into service after the building was placed into
service
• Applies to assets placed in service after December 31, 2017
72
Tax Reform Law (cont.)
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Cost Recovery Life Comparison
Life Classification
27.5 Years Residential (MACRS)
40 Years Residential (ADS)
39 Years Nonresidential (MACRS)
40 Years Nonresidential (ADS)
15 years Qualified Leasehold Improvement
(MACRS)
15 Years Qualified Restaurant Property (MACRS)
15 Years Qualified Retail Improvement (MACRS)
39 Years Qualified Leasehold Improvement (ADS)
39 Years Qualified Restaurant Property (ADS)
39 Years Qualified Retail Improvement (ADS)
Life Classification
27.5 Years Residential (MACRS)
30 Years Residential (ADS)
39 Years Nonresidential (MACRS)
40 Years Nonresidential (ADS)
39 Years Qualified Improvement Property
(MACRS)
40 years Qualified Improvement Property (ADS)
Sec. 179 Roof, HVAC, Fire Protection, Security
and Alarm Systems – Not original UOP
73
2017 Tax Law 2018 Tax Law
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Depreciation Limitations: Luxury Automobiles and Personal Use Property
• Increases to annual depreciation limitations placed on passenger automobiles
• New limitations will be indexed for inflation
74
Year Limitation
1 $3,160
2 $5,100
3 $3,050
4+ $1,875
2017 Tax Law 2018 Tax Law
Year Limitation
1 $10,000
2 $16,000
3 $9,600
4+ $5,760
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Research and Experimental Expenditures
• R&E and software costs maybe
expensed or elect to capitalize
and amortize over 60 months –
section 174
• Can elect to recover over 10
years, subject to AMT – 59(e)
75
2017 Tax Law Tax Reform Law• Capitalized and amortized over
60 months starting with tax
years beginning after December
31, 2021
• Research conducted outside
the United States capitalized
and amortized over 15 years
• Current AMT considerations
remain the same for individuals
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Cost Recovery: Planning Considerations
• 100% bonus depreciation and impact on qualified business
income deduction
• 100% bonus depreciation in a year that creates or increases a
net operating loss
• M&A considerations – benefits created for both buyers and
sellers in deals structured as asset sales and deemed asset
sales
76Return to Table of Contents
Other Changes Impacting Businesses:
Limitation on Deduction of InterestTracey Erbe, Tax Manager
Business Interest Expense
• Business interest expense is generally
deductible, subject to certain
limitations
78
2017 Tax Law Tax Reform Law• Limits the deduction of business interest
expense in excess of:
- Business interest income, plus
- 30% of business adjusted taxable
income, plus
- Floor plan financing interest
• Any disallowed interest expense is carried
forward indefinitely
• Does not apply to floor-plan financing
interest
• Defined formula for adjusted taxable income
• Defined business interest expense and
business interest income
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Business Interest Expense: Adjusted Taxable Income
Start with Taxable income of taxpayer
Less: Wages earned as an employee (applies to individual taxpayers only)
Less: Any item of interest income or gain that is not allocable to trade or business (investment income)
Less: Business interest income
Less: Income from electing out real property trades or businesses
Less: All items of income or gain of partnership or S corporation
Plus: Any item of deduction or loss that is not allocable to trade or business (investment losses)
Plus: Business interest expense
Plus: Net Operating Loss deduction
Plus: Depreciation, amortization and depletion before January 1, 2022 *
Plus: Losses from electing out real property trades or businesses
Plus: All items of deduction or loss of partnership or S corporation
Plus: Partner’s share of partnership excess taxable income
End with Adjusted taxable income (May not be less than zero)
*Addback for Depreciation, amortization and depletion not permitted after 2021
79
Secretary to provide other adjustments to the computation of adjusted taxable income
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Business Interest
DEFINITION OF BUSINESS INTEREST
• Business Interest Income
- The amount of interest includible in the taxpayer's gross income and allocable to a
trade or business
• Business Interest Expense
- Any interest paid or accrued on indebtedness properly allocable to a trade or business
- Does not include investment interest
- “Floor plan financing interest” is excluded from limitation
Defined as interest associated with indebtedness to finance self-propelled vehicle,
boat, or farm machinery or equipment held for sale or lease
80Return to Table of Contents
Business Interest Expense
BUSINESS INTEREST EXPENSE LIMITATION DOES NOT APPLY TO:
• Small businesses with 3-year average annual gross receipts less than $25,000,000
• Real property trades or businesses may elect out, but are required to use alternative
depreciation system (ADS) to depreciate:
- Nonresidential real property
- Residential real property
- Qualified improvement property
• Farming businesses may elect out, but are required to use ADS to depreciate any
property with a recovery period of 10 years or more
• Certain regulated public utilities
• Floor plan financing interest
81Return to Table of Contents
Business Interest Expense: Does not apply to…
REAL PROPERTY TRADES OR BUSINESSES
• Includes any real property development, redevelopment, construction,
reconstruction, acquisition, conversion, rental, operation, management,
leasing or brokerage trades or businesses (IRC §469(c)(7)(C))
• Election out of interest limitation is irrevocable
• Requirement to use ADS system could include switch for existing property
in addition to any new and future acquisitions
82Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
• Interest deduction applies first at the entity level
- Any deduction is taken into account in determining the non-separately stated
taxable income or loss of pass-through entity
• Business interest not deducted can be carried forward indefinitely
- Special rules apply to partnerships
• Adjusted taxable income of each partner or shareholder is determined without
regard to partner’s or shareholder’s distributive share of income or deductions of
the entity
- This rule prevents double counting of same dollars used in computing the
adjusted taxable income of entity from generating additional interest deductions
from income passed through to the partners or shareholders
83Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
• “Excess taxable income” of a pass-through is passed through to partners or
shareholders
- If an entity has excess taxable income for purposes of deduction limit, such excess
is passed through to partners of shareholders
- Adjusted taxable income of each partner or shareholder is increased by its share of
the entity’s taxable income
• Excess taxable income from a pass-through increases the partner’s adjusted taxable
income, which can increase the interest deduction at the partner level
- It cannot be used to deduct disallowed interest from other pass-through entities
• Disallowed partnership interest is passed through to the partners and is carried
forward to the next year. It may only be deducted to the extent of 30% of excess
taxable income from that same partnership activity
84Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
• Excess taxable income is a percentage of the entity’s adjusted taxable income.
Percentage is:
- The excess of:
30% of the entity’s adjusted taxable income, over
The amount (if any) by which the entity’s business interest expense,
reduced by floor plan financing interest, exceeds the entity’s business
interest income
- Divided by 30% of the entity’s adjusted taxable income
• This excess taxable income is added to a partner’s or shareholder’s adjusted
taxable income which allows the taxpayer to deduct more interest to the extent
the entity could have deducted more interest
85Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 1
• Roy is a 50% partner in ABC Partnership
• ABC Partnership has adjusted taxable income of $100,000 and business
interest expense of $20,000
• ABC Partnership deducts $20,000 of business interest because the amount
does not exceed its business interest expense limitation of $30,000 ($100,000 x
30%)
• Since ABC Partnership could have deducted an additional $10,000, Roy is
allocated $16,667 of excess taxable income [($10,000 / $30,000) x $100,000 x
50%]. This allows Roy to deduct an additional $5,000 of interest ($16,667 x
30%)
86Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXCESS BUSINESS INTERSET EXPENSE
• For S corporations, carryforward stays at corporate level
• For partnerships, excess is allocated to each partner as non-separately
stated taxable income or loss
87Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXCESS BUSINESS INTEREST EXPENSE FROM PARTNERSHIPS (NOT APPLICABLE TO S CORPS)
• Partners treat excess business interest as business interest in succeeding taxable year
• Allocated excess interest carried forward to a succeeding year by a partner is treated as paid or
incurred by such partner in succeeding year only to extent the partner is allocated “excess taxable
income” from such partnership in succeeding year
• If partner does have enough excess taxable income from the entity to offset excess business
interest carried forward to that year, excess becomes interest not deemed “paid” by partner in that
year. Therefore, excess business interest carried forward to succeeding tax years.
• Adjusted basis of partner’s interest in partnership is reduced in the year excess business interest is
allocated to partner (but not below zero)
• Excess business income does not carryforward
• Upon disposition of applicable partnership interest, remaining excess business interest is added to
partnership interest tax basis
88Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 2
• Partnership P is owned 50/50 by XYZ Corporation and an individual
• P’s adjusted taxable income (before interest expense): $200
• P’s business interest expense: $60
• XYZ Corp has adjusted taxable income of zero (excludes interest
expense)
• XYZ Corp’s business interest expense is $25
89Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 2
Step One: Calculate limitation and income at Partnership level
• P’s interest deduction limit is $200 x 30% = $60
• P’s taxable income is $200 - $60 = $140
• XYZ Corp and the individual each receive $70 of taxable business
income
90Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 2
Step Two: Calculate limitation and income at XYZ Corp level
• Maximum interest deduction deducted at P level
- No interest deductions limited
- No excess business income
- P’s income is disregarded for XYZ adjusted taxable income calculation
• XYZ’s interest deduction limit: $0 x 30%
• XYZ’s $25 of business interest expense is limited
• XYZ has a $25 interest expense carryover (carryover is indefinite)
91Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 3
• Partnership P is owned 50/50 by XYZ Corporation and an individual
• P’s adjusted taxable (before interest income): $200
• P’s business interest expense: $40
• XYZ Corp has net taxable income of zero (Excludes interest expense)
• XYZ Corp’s business interest expense: $25
92Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 3
Step One: Calculate limitation and income at Partnership level
• P’s interest deduction limit: $200 x 30% = $60
• P’s taxable income $200 - $40 = $160
• Full income limit isn’t used Calculate excess taxable income allocated to XYZ
corporation:
x Adjusted
taxable income
(60 - 40 + 0 - 0) / 60 x 200 = $66.67
• XYZ Corporation and individual each receive an allocation of $80 of taxable income
and $33.33 of excess taxable income
(Int. deduction limit – Int. expense + Floor Plan Int. – Bus. Int. Income)
Int. deduction limit
93Return to Table of Contents
Business Interest Expense: Treatment by Pass-throughs
EXAMPLE 3
Step Two: Calculate limitation at XYZ Corp level
• Distributive share of excess taxable income from P is added to the adjusted taxable
income of XYZ
• XYZ’s deduction for business interest is limited to 30% of the sum of:
- Adjusted taxable income
- Allocation of excess taxable income from P
• XYZ’s interest deduction limit: 30% x ($0 + $33.33) = $10
• XYZ Corporation’s $25 of interest expense is limited to $10
• XYZ Corp has a $15 interest expense carryover (carryover is indefinite)
94Return to Table of Contents
Other Changes Impacting Businesses:
Meals & Entertainment ExpensesRudy Thomas, Tax Partner
Meals & Entertainment Changes
Old Law New LawImportant
Considerations
Planning
Item
• 50% deduction for
eligible meals &
entertainment
expenses
• 100% deduction for
meals provided at
employer-operated
eating facility and
meals provided for
the convenience of
employer
• No deduction
allowed for activities
considered to be
entertainment,
amusement,
recreation
• Meal expenses
limited to 50% for
meals provided on
employer premises
• No deduction allowed for
operation of employer-
operated eating facilities
after 12/31/2025
• No deduction allowed for
employee meals
provided for the
convenience of the
employer after
12/31/2025
• Create separate
general ledger
account for non-
deductible
entertainment
expenses
96Return to Table of Contents
Deduction of Entertainment and Fringe Benefits: Examples
Examples of items which are no longer deductible in any part:
• Entertainment (i.e., tickets to sporting events)
• Dues to any club formed for the principle purpose of entertainment –
may include pleasure, business, recreation, or social clubs
• Transportation fringe benefits
• Expenses incurred to provide transportation for employees’ commuting
purposes
97Return to Table of Contents
Deduction of Entertainment: Dues
• Dues are deductible if the taxpayer is engaged in a trade or business, the dues are
incurred in carrying on that trade or business, and the payment is an ordinary and
necessary expense.
• Payments to the following organizations are deductible (unless the organization’s
principal purpose is providing entertainment to members):
- Business leagues
- Trade associations
- Chambers of commerce
- Boards of trade
- Real estate boards
- Profession organizations (e.g., bar and medical associations)
- Civic or public service organizations (e.g., Kiwanis, Lions, Rotary and Civitan)
98Return to Table of Contents
Other Changes Impacting Businesses:
State ConformityRudy Thomas, Tax Partner
State Conformity: Types of Conformity
For most states, the IRC is the starting part for calculating state taxable income. For these states, IRC conformity can be broken into 3 categories:
• Fixed
- The states conform to the IRC as of a certain date
- Conformity for these states is generally NOT automatic
- The state Legislature must affirmatively conform to any IRC changes subsequent to that date
• Rolling
- The states conform to the IRC as applicable for Federal tax purposes
- Conformity for these states is generally automatic
- The state Legislature must then affirmatively decouple from any IRC changes
• Selective
- The states either conform or decouple from various code sections and/or public laws that are passed
- Conformity in these states can depend on whether an existing section of the IRC is being amended or if a new section is being introduced.
100Return to Table of Contents
State Conformity: Types of Conformity
101Return to Table of Contents
State Conformity: Items to be Addressed by States
Some of the items that will need to be addressed by states include:
• Bonus Depreciation
Will states continue to decouple from bonus depreciation and will more consider doing so?
• Interest Limitations
Will the states follow the Federal interest limitations, even if the state decouples from bonus depreciation?
• NOL Limitations
For states which require tracking state specific NOLs, will the new NOL limitations be applied?
102Return to Table of Contents
State Conformity: When Will We Know
• It will take time for the state impact of tax reform to become clear
- For the states with fixed and selective conformity, the Legislatures must meet and determine whether or not to conform
- For states with rolling conformity, the Legislatures still must meet and decide to decouple from specific provisions
• The current conformity for states will be unique for each particular state
103Return to Table of Contents
Tax Reform:
International ImplicationsStani Fowler, Tax Senior Manager
U.S. in a Global Tax Context
105Return to Table of Contents
Tax Competitiveness Rankings 2017
Country Overall Rank
Estonia 1
New Zealand 2
Switzerland 3
… …
United Kingdom 14
… …
Germany 23
… …
Mexico 25
… …
Greece 29
United States 30
… …
France 35
106Return to Table of Contents
Worldwide Tax System Trends
107Return to Table of Contents
Worldwide Tax System Trends
108Return to Table of Contents
International provisions
Main purpose is to introduce a territorial system of taxation
• Includes introduction of participation exemption
• Transition rules for deferred income
• Strengthening of base erosion rules
109Return to Table of Contents
• Participation exemption for dividends (“DRD”)
• Deemed repatriation of Post 1986 Earnings and Profits
• Base Erosion Anti-Abuse Tax (“BEAT”)
• Global Intangible Low Taxed Income (“GILTI”)
• Deduction for Foreign Derived Intangible Income (“FDII”)
110
INTERNATIONAL TAX
• New IRC §245A
• 100% DRD for foreign-source dividends received from 10% owned
foreign corporations
• No credit for foreign withholding taxes on incoming dividends
• DRD does not apply to individual shareholders or S-corporations
International: Participation Exemption System
111
Tax Reform Law
Return to Table of Contents
• Tax is assessed on accumulated earnings and profits (E&P) at rates of:
- 15.5% of E&P attributable to liquid assets (i.e., cash and cash equivalents)
- 8% of E&P attributable to illiquid assets (i.e., all other assets)
• Tax can be paid over 8 years
• Tax applies to “Specified Foreign Corporations” - CFC or foreign corporation
that has at least one domestic shareholder that is a US corporation.
• Foreign tax credits can be applied, subject to a “haircut” for the reduction in
US tax rate
International: Deemed Repatriation
112
Tax Reform Law
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Tax Reform Law• Base erosion and anti-abuse tax (BEAT) – new IRC §59A
“An attempt to level the playing field between US-headquartered parent
companies and foreign-headquartered parent companies.” -Unified Framework
• Acts as a minimum tax for corporations imposed on certain cross-border related-
party payments made by large multi-nationals
• Applies to US corporations:
- With average annual gross receipts > 500 million, and
- Which have a “base erosion percentage” 3% or higher
• Base Erosion % equals Base Erosion Payments divided by Total Deductions
International: Base Erosion and Anti-Abuse Tax
113Return to Table of Contents
International: Base Erosion and Anti-Abuse Tax
DEFINITIONS
• Base Erosion Payment is any payment to a foreign related
person after 2017 for which a deduction is allowable
- Excludes amounts paid for costs of goods sold and eligible
services
• Total Deductions for purposes of calculating the BEAT
percentage means total deductions allowable for the year,
excluding NOLs, the participation exemption, the deduction
allowed under new IRC §250 for foreign intangible income, and
any amounts paid for costs of goods sold and eligible services
114Return to Table of Contents
International: Base Erosion and Anti-Abuse Tax
DEFINITIONS
• Related person for purposes of applying the BEAT rules means
- Any foreign shareholder with direct, indirect, or constructive
ownership of at least 25% (vote or value)
- Any person related to the corporation or 25% owner under IRC
§§ 267(b) or 707(b)(1)
- Any person related for purposes of transfer pricing rules under
IRC §482
115Return to Table of Contents
International: Base Erosion and Anti-Abuse Tax
COMPUTATION
• BEAT minimum tax amount is equal to excess of (a) over (b)
(a)10% x Modified Taxable Income
(b)Pre-credit regular income tax liability reduced by:
R&D credits
80% of applicable IRC §38 credits
• No FTCs or deductions
• In tax years beginning after 2025
- The percentage applied to modified taxable income in (a) above is increased from 10% to 12.5%
- R&D credits and applicable IRC §38 credits may no longer reduce the pre-credit regular income tax liability in (b) above
116Return to Table of Contents
Tax Reform Law• Global intangible low-tax income (GILTI) provisions under new IRC §951A require US
shareholders of a CFC to include currently in income its GILTI. Similar to current Subpart F
regime
• 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 equal to 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.
• IRC §951A requires US shareholders of CFCs to include their pro rata share of GILTI in current
income, similar to other Subpart F inclusions
International: Global Intangible Low-Taxed Income (GILTI)
117Return to Table of Contents
International: Global Intangible Low-Taxed Income (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.
118Return to Table of Contents
International: Global Intangible Low-Taxed Income (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).
119Return to Table of Contents
International: Global Intangible Low-Taxed Income (GILTI)
EXAMPLE
120
GILTI Inclusion (plus §78 gross up) $800,000
Less: 50% Deduction for GILTI (400,000
)
Equals: US Taxable Income Inclusion $400,000
US Tax on GILIT Inclusion at 20% $84,000
Less: Credit for Foreign Taxes (84,000)
Net US Tax Due $0
Implications for Corporate Shareholder
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International: Global Intangible Low-Taxed Income (GILTI)
EXAMPLE
121
Implications for Individual Shareholder
GILTI Inclusion (plus §78 gross up) $800,000
No Deduction for GILTI (0)
Equals: US Taxable Income Inclusion $800,000
US Tax on GILIT Inclusion at 37% $296,000
Less: Credit for Foreign Taxes (0)
Net US Tax Due $296,000
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Tax Reform Law• Foreign Derived Intangible Income (FDII) provisions under new IRC §250
imposes a tax on excess returns earned directly by a US corporation from
foreign sales or services
• 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 December
31, 2025 (resulting in an effective rate of 16.406%)
• FDII is only available to C corporations other than RICs or REITs
• FDII will benefit corporations with low fixed asset values, such as
companies in services or technology sectors
International: Foreign-Derived Intangible Income (FDII) Deduction
122Return to Table of Contents
International: Foreign-Derived Intangible Income (FDII) Deduction
INCOME ELIGIBLE FOR FDII DEDUCTION
• Income derived from
- Property sold, including licenses and leases, to any non-US person which is for foreign use, or
- Services provided to foreign persons or with respect to property located outside the US
• “Foreign use” means any use, consumption or disposition which is not in the US
123Return to Table of Contents
International: Foreign-Derived Intangible Income (FDII) Deduction
COMPUTING THE DEDUCTION FOR FDII
• FDII is 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 is equal to net income less the deemed tangible income return
• Deemed tangible income return is equal to 10% of qualified business asset investments
124Return to Table of Contents
International: Foreign-Derived Intangible Income (FDII) Deduction
EXAMPLE 3
125
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%
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Tax Reform: Impact on Pass-Through Entities
Robert Bradham, Tax Partner Blair Clawson, Tax Manager
Pass-through: Qualified Business Income Deduction
• For tax years beginning after December 31, 2017, allows an individual taxpayer
(and a trust or estate) a deduction up to 20% based on an individual’s domestic
qualified business income from a partnership, S Corporation, or sole
proprietorship
• Assuming in highest 37% bracket with full deduction allowed, it produces an
effective 29.6% Federal rate
• Set to expire at the end of 2025. Under the new legislation, the deduction is
not available for tax years beginning on or after January 1, 2026.
• Increased reporting for pass-through entities to partners and shareholders
• This is the opposite of tax simplification…it can be a complex calculation & has
areas of uncertainty
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Pass-through: Qualified Business Income Deduction
Items of consideration:
• What are “qualifying business activities”?
• What is “qualified business income” or “QBI”?
• Claiming the deduction (netting, overall TI, more limitations)
• Income limitation exception (AGI thresholds)
• Computations and complications
128Return to Table of Contents
Pass-through: Qualified Business Income Deduction
QUALIFYING BUSINESS ACTIVITIES
• Qualified trades or businesses that meets the following criteria:
- Generally must be U.S. domestic trade or business
- Based on qualified business income (includes both passive and non-passive)
- Excludes trade or businesses of performing services as an employee
- Excludes specified service trade or businesses:
Fields of health, accounting, law, actuarial science, performing arts, consulting,
athletics, financial services, and brokerage services (excludes engineers and
architecture)
Where the principal asset is the reputation or skill of the owners or employees
That involves the performance of services of investing and investment managing
trading or dealing in securities, partnership interests, or commodities
129Return to Table of Contents
Pass-through: Qualified Business Income Deduction
QUALIFYING INCOME
• Qualified business income
• Qualified cooperative dividends
• Qualified REIT dividends (excludes REIT capital gains)
• Qualified publicly traded partnership income
130Return to Table of Contents
Pass-through: Qualified Business Income Deduction
CLAIMING THE DEDUCTION
• Individuals, estates and trusts are eligible for the qualified business income deduction
• The deduction is calculated at the taxpayer level with information supplied by the
qualified trade or business
• The deduction is claimed on the taxpayer’s tax return
• For individuals, deduction claimed after taxable income is computed
- Below the line, not a deduction for AGI; not an itemized deduction
• Deduction available to taxpayers that itemize deductions, as well as those that do not
• Deduction does not reduce self-employment income
• Same for AMT and Regular Tax
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Pass-through: Qualified Business Income Deduction
INCOME LIMITATION EXCEPTION FOR SPECIFIED SERVICE TRADES OR
BUSINESSES
• Taxpayers with income from a specified service trade or business may
qualify for 20% deduction if taxable income is less than $315,000 (MFJ)
or $157,500 (all other filers)
• The 20% deduction is phased out as taxpayers’ taxable income increases
from $315,000 to $415,000 (MFJ) and $157,500 to $207,500 (all other
filers)
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Pass-through: Qualified Business Income Deduction
INCOME LIMITATION EXCEPTION
• If taxable income is less than $315,000 (MFJ) or $157,500 (all other
taxpayers), the limitation related to W-2 wages / capital does not apply
• If taxable income is between $315,000 and $415,000 (MFJ) or $157,500
and $207,500 (all other taxpayers), the limitation related to W-2 wages /
capital phases in
133Return to Table of Contents
Pass-through: Qualified Business Income Deduction
CALCULATING THE DEDUCTION
Equal to the lesser of (1) or (2):
(1) Combined Qualified Business Income = (a) + (b) + (c)
(a) The lesser of (i) or (ii)
(i) 20% of the business income of the qualified trade or business, or
(ii) The W-2 Wage / Capital Limitation, which is the greater of (A) or (B):
(A) 50% of W-2 wages paid with respect to the qualified trade or business, or
(B) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property
(b) 20% of the aggregate REIT dividends and qualified publicly traded partnership income
(c) Lesser of (i) or (ii)
(i) 20% of qualified cooperative dividends, or
(ii) Taxable income reduced by net capital gain
(2) 20% of taxable income less net capital gain
134Return to Table of Contents
Pass-through: Qualified Business Income Deduction
MULTIPLE QUALIFIED BUSINESSES
• Compute the 20% Deduction for each qualified trade or business (Step 1) and add
them together
• Then apply the overall limitation (Step 2)
- The sum of the deductions cannot exceed 20% of the excess of taxable income
over net capital gains
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Pass-through: Qualified Business Income Deduction
DEFINITIONS
• W-2 wages are generally wages and deferred compensation reported to the Social
Security Administration
• Taxpayers’ wages derived from the Qualified Trade or Business are not added back to
determine Qualified Business Income
• For fiscal year partnerships and S corporations, W-2 wages are the calendar year
wages paid by the business during the calendar year ending during the taxable year
- Example: A partnership with a 5/31/2018 fiscal year end would use W-2 wages paid
for the calendar year ending 12/31/2017 for purposes of applying the wage
limitation
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Pass-through: Qualified Business Income Deduction
DEFINITION OF QUALIFIED PROPERTY
• The acquisition cost (unadjusted basis) of tangible and real property (excluding land)
• Held for use by the qualified trade or business at the close of the tax year
• Used at any point during the tax year
• Depreciable period for which has not ended before the close of the taxable year
- Depreciable period is the period beginning on date the property was first placed in
service and ending on the later of:
10 years after such date, or
The last day of the last full year in the applicable recovery period under section 168
(GDS recovery period)
- Example: A calendar year partnership acquires equipment with a 5 year GDS recovery
period on 7/1/2015. The equipment is considered qualified property through the 2025
tax year
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Pass-through: Qualified Business Income Deduction
REAL ESTATE
• Owners of real estate-related businesses may qualify for the new 20% pass-through deduction
• Will need additional guidance from IRS/Department of Treasury
EXAMPLE
• Oscar owns an office building constructed in 2012 and pays no wages
• Original cost basis and depreciable lives are as follows
Land $200,000
Building $1,000,000/ 39 Years
FF&E $400,000/ 5 Years
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Pass-through: Qualified Business Income Deduction
EXAMPLE CONTINUED
• In 2018, his pass-through deduction is limited to 2.5% * $1,400,000 = $35,000
- Both the cost of the building and the equipment qualifies, because each asset was
owned for the longer of its depreciable life or 10 years as of 2018
• Now assume the building was constructed in 2005
- Only the building qualifies for the calculation because as of 2018, the FF&E is all
older than 10 years or it’s depreciable life has expired
- Deduction is limited to 2.5% * $1,000,000 = $25,000
139Return to Table of Contents
Pass-through: Qualified Business Income Deduction
RECAP: WHAT DO WE KNOW?
• Taxable Income under $315K
- 20% Deduction not subject to wage or property limitations
- Applies to SSTB and Qualified Business Activities
• Taxable Income between $315K and $415K
- Wage and property limitations are phased-in*
- Applies to SSTB and Qualified Business Activities
• Taxable Income over $415K – Qualifying Business Activities
- Wage and property limitations fully phased-in*
• Taxable Income over $415K – SSTB
- No Deduction
140
*Wage and property limitations may not apply in cases where calculations yield an amount exceeding 20% of your QBI
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Pass-through: Qualified Business Income Deduction
WHAT DON’T WE KNOW?
• Congress instructed the Secretary to issue regulations
• Awaiting guidance on:
- Application of provision to tiered entities
- Application of the rules in short tax years and in years of acquisition or disposition
of a major portion of a trade or business
- Anti-abuse rules for W-2s
- Determining unadjusted basis for like kind exchange or involuntary conversion
property
- Examples and instruction regarding activities “where the principal asset is the
reputation or skill of the owners or employees”
141Return to Table of Contents
Qualified Business Income Deduction: Example 1
FACTS
• Taxpayer, Robert, owns an S corp that sells golf clubs and earns
$100,000 in wages and $150,000 in qualified business income
• Spouse, Claire, works as an accountant and earns a salary
• Robert and Claire’s joint taxable income is $300,000 and they file MFJ
• Net Capital Gains equal $15,000 (with $0 REIT/cooperative dividends or
PTP income)
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Qualified Business Income Deduction: Example 1
DEDUCTION
• Business income is not from an SSTB
• Taxable income before the deduction falls below $315,000 threshold, so there
are no wage or capital limitations
• Deduction is the lessor of:
1) 20% of Qualified Business Income
20% * $150,000 = $30,000
or
2) 20% of Taxable Income over Net Capital Gains
20% * (300,000-15,000) = 57,000
Total Deduction is $30,000
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Qualified Business Income Deduction: Example 2
FACTS
• Taxpayer, Dog, owns a pass-through veterinary practice and earns
$200,000 in wages and $100,000 in business income
• Spouse, Kat, sells pet clothing on Etsy; Kat’s qualified business income
totals $220,000
• Kat’s share of allocable wages from her qualified business is $70,000 and
her share of the unadjusted basis of qualified property is $500,000
• Dog and Kat’s joint taxable income is $520,000 and they file MFJ (with $0
capital gain/REIT/cooperative dividends/PTP income)
144Return to Table of Contents
Qualified Business Income Deduction: Example 2
DEDUCTION
• Taxable income before the deduction exceeds $415,000 threshold; the
wage and capital limitation is fully phased in
• Dog’s business income does not qualify since he operates a Specified
Service Trade or Business
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Qualified Business Income Deduction: Example 2
DEDUCTION CONTINUED
Deduction is the lesser of:
1) The lesser of (i) or (ii)
(i) 20% of qualified business income
20% * 220,000 = 44,000
(ii) The W-2 Wage / Capital Limitation, which is the greater of (A) or (B):
(A) 50% of W-2 wages paid with respect to the qualified trade or business, or
50% * 70,000 = 35,000
(B) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property
25% * 70,000 + 2.5% * 500,000 = 30,000
2) 20% of Taxable Income over Net Capital Gains
20% * (520,000-0) = 104,000
Total Deduction is $35,000
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Qualified Business Income Deduction: Example 3
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 0 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
147
PROPERTY AND WAGE LIMITATION COMPARISON
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Qualified Business Income Deduction: Example 4
$315k $345K $415K
Qualified Business Income 300,000 300,000 300,000
Share of W-2 Wages 80,000 80,000 80,000
Qualified Property 1,000,000 1,000,000 1,000,000
Initial Deduction 60,000 60,000 60,000
50% Wage Limitation 40,000 40,000 40,000
25% Wage + 2.5% Property Limitation 45,000 45,000 45,000
Reduction in Initial Deduction 0 15,000 0
Phase-In of Reduction (30%) 0 4,500 0
Tentative Deduction 60,000 55,500 45,000
PROPERTY AND WAGE LIMITATION: VARYING INCOME LEVELS
148Return to Table of Contents
Pass-through: Qualified Business Income Deduction
LOSSES & CARRYOVERS
• If the total of all qualified trade or business amounts results in an net negative
amount for the tax year, the negative amount is carried forward and offsets the
20% deduction amount calculated in the following year
EXAMPLE
• Dwight and Angela file MFJ and both have qualifying business activities
• Taxable income is less than $315,000 and they have zero capital gains
• In 2018, they have qualified business income/(loss) totaling ($50,000)
• In 2019, Dwight has qualifying business income from beet sales of $150,000
and Angela has a qualified business loss from her cat daycare of ($40,000)
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Pass-through: Qualified Business Income Deduction
DEDUCTION
• No deduction is allowed in 2018
• 2019 deduction is calculated as follows:
150
2019 Qualified Business Income 150,000 x 20% = 30,000
2019 Qualified Business Loss (40,000) x 20% = (8,000)
2018 QBI Loss Carryover (50,000) x 20% = (10,000)
Total 2019 Deduction 12,000
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Pass-through: Modified Loss Limitation Rules
• Excess Business Loss of a non-passive activity cannot be deducted and shall be carried
forward as a net operating loss
• Note NOLs carryovers generated after December 31, 2017 cannot offset more than
80% of taxable income
• Excess Business Loss for the tax year is defined as the excess of (a) the taxpayer’s
aggregate deduction attributable to trades or businesses, over (b) the sum of aggregate
gross income or gain attributable to trades or businesses, plus (c) $500,000 for MFJ or
$250,000 for other filers (indexed for inflation)
• For partnerships and S corporations, the “excess business loss limitation” applies at the
partner/shareholder level
• This provision is applied after first applying the section 469 passive activity rules
• Bottom line – individual taxpayers cannot apply more than $500,000 of business losses
against non-business income in a given year ($250,000 for single filers)
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Pass-through: Qualified Business Income Deduction
PLANNING OPPORTUNITIES
• 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
152Return to Table of Contents
Pass-through: Qualified Business Income Deduction
• Taxable income < $315,000
deduction MAY just be the lesser of 20% of QBI or 20% of taxable income less net capital gains
• Taxable income $315,000 – $415,000
wage and capital limitations phased in
• Taxable income > $415,000
no deduction for SSTBs
wage and capital limitation fully phased in for non-SSTBs
• Stay tuned! More guidance to come!
153
CONCLUSION
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Entity Selection Considerations:
S Corp vs. C Corp
Sarah Windham, Tax Partner
Entity Selection
• Tax reform brings significant individual and business tax modifications that may prompt taxpayers to reconsider entity structure
• There are many competing factors that should be carefully considered before making a hasty change to the choice of business entity from a tax perspective
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Entity Selection: Overview
• Reduced corporate tax rate from a
maximum of 35% to 21%
• Double taxation regime
- Earnings taxed when earned at the
corporation level
- Dividends taxed when distributed to
shareholders
• Shareholders potentially subject to
additional 3.8% net investment income
tax on distributions
• Certain deductions are available to
corporations that are not available to
individual taxpayers
- State and local tax deduction
156
C Corporations Pass-Through Entities• Income taxed at individual tax rates which
vary based on individual income levels
- Highest individual tax rate of 37%
• New qualified business income deduction
available for certain qualifying businesses
allowing a reduction of up to 20% of
qualified business income
• Reduced individual tax rates and qualified
business income deduction are both set to
expire for tax years beginning after
December 31, 2025
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Eligible Terminated S Corporations
157
• Distributions from a terminated S-
Corporation are treated as paid
out from its AAA
• Any adjustments arising from
changes in methods of accounting
necessitated by the conversion
are taken into account over a 4-
year period
• During the post-termination period,
distributions are paid from AAA,
and from E&P in the post
termination period
• During the post-termination period,
distributions are paid from AAA
• Distributions from a terminated S-
Corporation after the post-
termination period are treated as
paid from AAA and E&P on a
ratable basis
• Any adjustments arising from
changes in methods of accounting
necessitated by the conversion are
taken into account over a 6-year
period
2017 Tax Law Tax Reform Law
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Entity Selection Considerations
EFFECTIVE TAX RATE: ASSUME HIGHEST INDIVIDUAL TAX BRACKET
158
C Corporations
Earnings 100
Corporate Tax Expense 21
Net Earnings Available for Distribution 79
Individual Tax Expense on Dividend 15.8
Net Investment Income Tax 3
Total Tax Expense 39.8
Pre-tax Earnings 100
Effective Tax Rate 39.8%
Pass-through Entities
Earnings 100
Entity-level Tax Expense 0
Net Earnings to Individual 100
Qualified Business Income Deduction (20)
Net Taxable Earnings 80
Individual Tax Expense on Earnings 29.6
Total Tax Expense 29.6
Pre-tax Earnings 100
Effective Tax Rate 29.6%
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Example 1
• Current S-corporation
• Estimated profit of $1million in 2018 with 5% growth
• W-2 wages of $2.5 million with 8% growth
• No distributions other than to pay taxes as a S-corp
• Not a service business
• Estimated value of company:
$10 million if stock sale
$12 million as asset sale
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Example 1
160
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Example 1
161
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Example 1
162
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Example 1
163
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Example 1
164
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Example 2
• Current S-corporation
• Estimated profit of $1million in 2018 with 5% growth
• W-2 wages of $2.5 million with 8% growth
• Distributions of 80% of profit annually
• Service business
• Estimated value of company:
$10 million if stock sale
$12 million as asset sale
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Example 2
166
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Example 2
167
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Example 2
168
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Example 2
169
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Example 2
170
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Entity Selection: Other Key Considerations
• Limitations on qualified business income deduction
• Certain business activities are ineligible for 20% deduction (specified service trades or businesses)
• Wage and capital limitations may reduce amount of deduction allowable
• Income levels and preferential tax rates on dividends
• Liquidity Needs
- Accumulated earnings tax assessed on C corporations at 20% of retained earnings deemed to exceed the corporation’s ordinary business needs
171Return to Table of Contents
Entity Selection: Other Key Considerations
• Exit strategy
- Buyers are incentivized to seek out asset sales
- Double taxation on sale of assets at entity level and shareholder level
- Need to leave enough cash in C corporation to pay tax upon eventual sale of assets
• Reduced individual and qualified business income deduction set to expire for tax years beginning after December 31, 2025
• Reduction to C corporation tax rate is permanent
172Return to Table of Contents
Tax Reform: Impact to Individuals
Cristen Jones, Tax Manager Scott Russell, Tax Manager
INDIVIDUAL TAX REFORM CONSEQUENCES
• Individual tax rates
• Tax rate on capital gains and dividends
• Alternative minimum tax (AMT)
• Affordable Care Act
• Standard deduction
• Personal exemptions
• Child Tax credit and qualifying expenses
• Itemized deductions
• Other provisions
174
Individual Tax Rates
• Decrease of the top rate from 39.6% to 37%
• Tax brackets indexed for inflation to minimize “bracket creep”
- New method of indexing for inflation – based on chained CPI
• Tax rates are based upon taxable income
• Significant changes to taxable income computation
• Simplification of “kiddie tax” calculation
175Return to Table of Contents
Individual Tax Rates: Married Filing Joint
Tax Rate If taxable income is:
10% $0 - $18,650
15% $18,651 - $75,900
25% $75,901 - $153,100
28% $153,101 - $233,350
33% $233,351 - $416,700
35% $416,701 - $470,700
39.6% $470,701 or more
Tax
Rate
If taxable income is:
10% $0 - $19,050
12% $19,051 - $77,400
22% $77,401 - $165,000
24% $165,001 - $315,000
32% $315,001 - $400,000
35% $400,001 - $600,000
37% $600,001 or more
176
2017 Tax Rates Tax Reform Rates
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Individual Tax Rates: Single
Tax Rate If taxable income is:
10% $0 - $9,325
15% $9,326 - $37,950
25% $37,951 - $91,900
28% $91,901 - $191,650
33% $191,651 - $416,700
35% $416,701 - $418,400
39.6% $418,401 or more
Tax
Rate
If taxable income is:
10% $0 - $9,525
12% $9,526 - $38,700
22% $38,701 - $82,500
24% $82,501 - $157,500
32% $157,501 - $200,000
35% $200,001 - $500,000
37% $500,001 or more
177
2017 Tax Rates Tax Reform Rates
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Tax Rate on Capital Gains and Dividends
• Current tax law and rates remain in place
• Net capital gains taxed at a maximum of 20%
• Qualified dividends taxed at a maximum of 20%
• Gains from collectibles and unrecaptured depreciation
subject to higher rates
178Return to Table of Contents
Alternative Minimum Tax (AMT)
• AMT exemption amount for
MFJ taxpayers is $84,500
• Phase out threshold begins at
$160,900
• AMT exemption amount for MFJ taxpayers is $109,400 ($70,300 for single)
• Phase out threshold begins at $1,000,000 ($500,000 for single)
Note: certain items disallowed or limited under the 2017 Tax Act negatively impacted AMT prior to 2018 such as SALT, miscellaneous deductions, etc.
179
2017 Tax Law Tax Reform Law
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Affordable Care Act
• 3.8% net investment income tax remains in place
• 0.9% additional Medicare tax on earned income above $250,000 for
MFJ taxpayer’s remains in place
• Excise tax imposed on individuals who do not obtain minimum
essential coverage will be reduced to zero starting in 2019
- Note: No other ACA provisions are addressed in the new law. AS such,
excise tax on corporations that do not provide minimum essential coverage
was not reduced to zero.
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Standard Deduction
Filing Status Amount
Single $6,350
Married filing separate $6,350
Head of household $9,350
Married filing jointly $12,700
Filing Status Amount
Single $12,000
Married filing separate $12,000
Head of household $18,000
Married filing jointly $24,000
181
• The increased standard deduction for
taxpayers that are blind or 65 or older is
retained
• Taxpayers that are blind or 65 or older are
eligible for an increased standard
deduction. The amount of the increase is
dependent on the taxpayers’ filing status
and age of both spouses if married
2017 Tax Law Tax Reform Law
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Personal Exemptions
• Personal exemption for 2017
is $4,050 for single, spouse
and each dependent, subject
to phase-out
• Tax reform law suspends
personal exemptions for
single, spouse and each
dependent starting in 2018
• Increase in standard
deduction intended to
compensate for repealing
many itemized deductions
and the personal exemption
182
2017 Tax Law Tax Reform Law
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Child Tax and Qualifying Dependent Credit
• $1,000 tax credit per
qualifying child
• Credit phase-out at $110,000
of AGI for MFJ
• $2,000 tax credit per
qualifying child
• Credit phase-out at $400,000
of AGI for MFJ
• $500 non-refundable credit
for qualifying dependents
other than qualifying child
• $1,400 of the credit is
refundable, subject to phase-
outs
183
2017 Tax Law Tax Reform Law
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Itemized Deductions: Medical Expenses
• Medical deduction limited to
qualified medical expenses in
excess of 10% of adjusted
gross income
• Medical deduction limited to
excess of 7.5% of AGI for tax
years 2017 and 2018.
• Medical deduction limited to
excess of 10% of AGI for tax
years after 2018
• Deductions are the same for
regular tax and AMT
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2017 Tax Law Tax Reform Law
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Itemized Deductions: State and Local Tax (SALT)
• Deduction for state income
taxes
• Deduction for real estate
taxes
• Deduction for personal
property tax
• Deduction for other qualified
taxes
• AMT preference
• Same taxes allowed for
deduction
• Deduction not to exceed
$10,000
• Could be significant change
for some and insignificant for
others
• AMT preference
185
2017 Tax Law Tax Reform Law
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Itemized Deductions: Home Mortgage Interest
• Qualified residential interest
• Qualified mortgage
indebtedness = “acquisition
indebtedness”
• Can deduct on 1st and 2nd
qualifying home
• Qualified mortgage
indebtedness not to exceed $1
million
• First three bullets apply
• Qualified mortgage indebtedness
not to exceed $750,000
• Debt incurred before December 16,
2017 grandfathered
• Grandfathered debt cannot exceed
$1 million
• Grandfathered debt can be
refinanced, but cannot exceed
amount of debt refinanced186
2017 Tax Law Tax Reform Law
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Itemized Deductions: Home Equity Debt
• Home equity loan interest
deductible
• Qualified home equity
indebtedness not to exceed
$100,000
• No tracing rules on proceeds
of loan
• Home equity loan interest is
not deductible
• No grandfather provision
187
2017 Tax Law Tax Reform Law
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Itemized Deductions: Charitable Contributions
• Cash and non-cash
contributions of non-
appreciated property limited
to 50% of AGI
• Appreciated property limited
to 30% of AGI
• Contributions can be made to
public charities and certain
private foundations
• Cash contributions are
subject to 60% of adjusted
gross income
• Non-cash contributions
remain limited to 50% AGI
• Contributions to colleges in
exchange for seating rights to
athletic events are not
deductible
188
2017 Tax Law Tax Reform Law
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Itemized Deductions: Personal Casualty and Theft Losses
• Deduction may be claimed for
any loss sustained during the
tax year
• Losses must exceed amounts
compensated by insurance
• Subject to certain limitations
• 2017 losses incurred in a
federally declared disaster
zone maybe taken on the
2016 return (allows earlier tax
proceeds)
• Limits losses to only those
incurred in a federally
declared disaster zone
189
2017 Tax Law Tax Reform Law
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Itemized Deductions: Miscellaneous Itemized Deductions
• Individuals may claim
itemized deductions for
certain miscellaneous
deductions subject to 2% of
adjusted gross income
• Investment fees, safe deposit
box rentals, tax preparation
fees, etc.
• Unreimbursed employee
business expenses
• Suspends all miscellaneous
deductions that are subject to
the 2% floor
190
2017 Tax Law Tax Reform Law
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Itemized Deductions: The “Pease” Limitation
• Total amount of itemized
deductions is reduced by 3%
when adjusted gross income
exceeds certain thresholds
- Does not include medical
expenses
- Investment interest
expense
- Casualty theft
- Gambling losses
• Suspends the overall
limitation on itemized
deductions
191
2017 Tax Law Tax Reform Law
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Individual Tax Impact – Example
FACTS
• Married filing joint taxpayer
• 3 dependent children
• AGI: $400,000
• State income tax paid: $25,000
• Personal property tax paid: $5,000
• Mortgage interest paid: $20,000
• Outstanding mortgage debt on primary home: $1,000,000
(assume not a grandfathered mortgage)
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Individual Tax Impact – Example
193
Pre-Tax
ReformPost Tax Reform Notes
AGI $400,000 $400,000
Personal Exemptions @ $4,050
each (2 adults; 3 children) (20,250) - Repealed by H.R. 1
State Income Taxes Paid (25,000) (10,000)Limited to $10,000 total for all state and local
income and property taxes
Personal Property Tax Paid (5,000) - See above
Mortgage Interest Paid (20,000) (15,000)
Deductible up to $750,000 of indebtedness
($750,000 / $1,000,000 = 75% x $20,000
interest paid)
Taxable Income $329,750 $375,000
Tax Liability 84,034 83,379
Child Tax Credit ($1,000 per pre-
reform; $2,000 per post-reform)- (6,000)
Fully phased-out @: $130,000 MAGI pre-reform;
$420,000 MAGI post-reform
Net Tax Liability $84,034 $77,379
Effective Tax Rate 21.0% 19.3%
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Qualified Moving Expense Reimbursement
• Qualified moving expense
reimbursements are excludable
from an employee’s gross
income and from the employee’s
wages for employment tax
purposes
• Reimbursement amounts include
expenses that would have been
deductible as moving expenses
if directly paid or incurred by the
employee
194
2017 Tax Law Tax Reform Law• Suspends the exclusion from
gross income and wages for
qualified moving expense
reimbursements
• Exclusion is preserved for
member of the U.S. Armed
Forces and their family
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Qualified Moving Expense
• Individuals can claim an
above the line deduction for
allowable moving expenses
paid or incurred
• Criteria included starting a
new job at a new principal
place of business
• Specified distance and
employment status
requirements met
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2017 Tax Law Tax Reform Law
• Suspends the deduction for
moving expenses
• Certain provisions are
preserved for member of the
U.S. Armed Forces and their
family
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Alimony Payments
• Alimony and separate
maintenance payments are
deductible by the payor and
includible in income by the
payee
196
2017 Tax Law Tax Reform Law• Alimony and separate
maintenance payments are not
deductible by the payor and are
not includible in income by the
payee
• Effective date of this provision
is for any agreement executed
after December 31, 2018
• Also applies to agreements
executed before December 31,
2018 and modified after that
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Individual Provisions Set to Expire
197
Key Provision Sunset Date
Changes to individual income tax rates December 31, 2025
Changes to capital gain and qualified dividends tax rates December 31, 2025
Increased standard deduction December 31, 2025
Suspension of personal exemptions December 31, 2025
Increased child tax credit December 31, 2025
Suspension of “Pease” limitation on overall itemized deductions December 31, 2025
Suspension of 2% miscellaneous itemized deductions December 31, 2025
Limitation on home mortgage interest for indebtedness incurred after December 15, 2017 December 31, 2025
Itemized deduction limitation on state and local taxes December 31, 2025
Increased limitation for cash contributions December 31, 2025
Decrease in medical expense deduction December 31, 2018
Increase to AMT exemption and exemption phase-out amounts December 31, 2025
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Tax Reform: Charitable Planning
and Exempt Organizations
Harmony Romo, Tax Manager
Donor Related Provisions
• The adjusted gross income limitation for cash charitable contributions has been
increased from 50% to 60% for cash 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.
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Donor Related Provisions
THE GIVING VEHICLE
200
Private Foundations Public Charities (DAF)
Total Limit for all annual contributions 30% AGI 60% AGI
Tax Deduction for contributions of long-
term appreciated securitiesFMV 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 Contributions Up to 30% AGI Up to 60% AGI
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Exempt Organization Provisions
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.
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Donor Related Provisions
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
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ABLE Accounts
• Overall limit on contributions is
$14,000
203
2017 Tax Law Tax Reform Law• Same overall limit on contributions of
$14,000 (indexed $15,000 for 2018)
• Once limit is reached designated
beneficiary may contribute an additional
amount limited to the lesser of:
-The Federal poverty level line for a
one-person household ($12,060 for
2018), or
-The individual’s compensation for the
year
• Permitted to roll-over beneficiary 529
plan into ABLE account or 529 plan of a
family member (limitations still apply)
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529 Plans
• Earnings from 529 plans are
not taxable for federal
purposes
• Distributions not taxable if
used for qualified higher
education expenses such as
tuition, room and board, fees,
books, supplies and
equipment required for
enrollment
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2017 Tax Law Tax Reform Law
• Qualified higher education
expense is expanded to
include certain expenses and
tuition at an elementary or
secondary public, private or
religious school
• Tax-free distribution for
tuition, at an elementary or
secondary public private or
religious school is limited to
$10,000 per year per student
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Estate, Gift and Generation-Skipping Tax
• Taxes are imposed on certain gifts,
certain transfers at death, and
generation-skipping transfers.
• Gifts / Transfers at Death
- Basic lifetime exclusion amount of
$5,000,000 per individual (indexed for
inflation after base year 2010;
scheduled to be $5,600,000 in 2018)
- Gift transfers and transfers at death
are combined for purposes of
applying the basic exclusion
• Generation-Skipping Transfers
- Exemption amount is equal to gift tax
exclusion amount
• Basic lifetime exclusion amount increased
to $10,000,000 per individual (indexed for
inflation after base year 2016; expected
to be around $11,200,000 in 2018)
- Increase applies to Generation-
Skipping Transfers exemption amount
• Applies to estates of decedents dying and
gifts made after December 31, 2017 and
before January 1, 2026.
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2017 Tax Law Tax Reform Law
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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 1 million on the top 5 highest paid employees (there is an
exclusion for compensation paid in remuneration for medical
services by a licensed medical professionals).
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Exempt Organization Provisions
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.
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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
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Tax Reform Assessment and Implementation Services
Kip Hooker, Tax Partner
Tax Reform Assessment and Implementation Services
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Tax Reform Assessment and Implementation Services
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Assessment Tool Deliverable
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Tax Reform Assessment and Implementation Services
213Return to Table of Contents
Save the Date! Nov. 29th
DHG’s 6th Annual Charleston Executive Briefing
Legal Disclaimer:
The information in this presentation is based upon the internal revenue code and other relevant legalauthority as of a specific point in time. These authorities are subject to change or modification retroactivelyand/or prospectively and such changes may affect the validity or correctness of this information.Additionally, the information contained within the presentation may be tailored to a specific audience andtherefore may not be applicable to all taxpayers or all situations. This presentation does not constitute taxadvice by DHG.