Tax Reform: Key Changes and New Provisions

Thrive. Grow. Achieve.

Tax Cuts and Jobs Act - Highlights

Mitra Mamdouhi, PartnerJane Horn, Partner

1/23/18

TCJA-Highlights / Page 2

COURSE UPDATE DATE: JENNIFER SCALES-MOORE

COURSE REVIEWED BY: DEBRA HILDRETH

COURSE REVIEW DATE: 1/19/18

NASBA FIELD OF STUDY: TAX

CONTRIBUTORS

JANE BROOKS HORN, CPA – Partner

MITRA MAMDOUHI, CPA – Partner

DEBRA HILDRETH, CPA – Director

REBECCA OBEN, CPA – Manager

JENNIFER SCALES-MOORE – Manager


PROGRAM CONTENT

Major Tax Law Changes Under Tax Cuts And

Jobs Relief Act As It Pertains To:

– Individuals

– Corporations

– Pass-Through Entities

– Estates and Trusts


LEARNING OBJECTIVES

At the end of this course you will understand and

be able to discuss the major tax developments

affecting individuals, businesses and trusts and

estates.


INDIVIDUALS

Rates, Exemptions, Etc.:

•New income tax rates & brackets – There are still seven

brackets but the rates on some of these brackets have

been lowered. The new rates are effective for tax years

beginning after December 31, 2017 through December

31, 2025 - see attached schedules, these amounts will

be adjusted for inflation.


INDIVIDUALS


INDIVIDUALS


INDIVIDUALS


INDIVIDUALS

Rates, Exemptions, Etc.:

• Standard deduction - This amount has essentially been doubled. For single filers the standard deduction has increased from $6,350 to 12,000 and for married couples filing jointly, it has increased from $12,700 to $24,000.

• Personal exemptions - Previously taxpayers could claim a $4,050 personal exemption for themselves, their spouse and each dependent. This deduction had been eliminated under the new law.

• Kiddie Tax – Under prior law, a child’s investment income over $2,100 was subject to tax at the parents’ tax rate. Beginning in 2018, these earnings will be taxed at the rates that apply to estates and trusts. Those rates for 2018 range from 10% on income up to $2,550 and 37% over $12,500.


INDIVIDUALS

EXAMPLE:


INDIVIDUALS

Itemized Deductions:

• State and local tax (SALT) deduction:

–A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of: • 1. State and local property taxes not paid or accrued in carrying on a trade or

business, and

• 2. State and local income, (or sales taxes in lieu of income taxes) paid or accrued in the taxable year.

• Mortgage interest:

–In the case of taxable years beginning after December 31, 2017, and beginning before January 1, 2026, a taxpayer may treat no more than$750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately) . In the case of acquisition indebtedness incurred before December 15, 2017 this limitation is $1,000,000 ($500,000 in the case of married taxpayers filing separately).

• Home Equity Interest:

–For taxable years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity indebtedness.


INDIVIDUALS

• Medical expense:

–For taxable years beginning after December 31, 2016 and before January 1, 2019, the threshold for deducting medical expenses is 7.5% of AGI for all taxpayers.

• Charitable contributions:

–An increase in the income-based percentage limit for certain charitable contributions by an individual taxpayer of cash to public charities and certain other organizations from 50 percent to 60 percent.

• Miscellaneous itemized deductions:

–All miscellaneous itemized deductions are no longer allowed, this includes tax preparation and investment fees.

• Overall limitation:

–The new law repeals the overall limitation on itemized deductions.


INDIVIDUALS – OTHER CHANGES

Other Adjustments:

• Alimony Deduction By Payor/Inclusion By Payee Suspended:

–Deduction for alimony and separate maintenance payments and inclusion of the

payments in gross income are repealed

–Effective for divorce or separation agreements executed or modified after 2018

–Modifications of agreements executed before January 1, 2019 must expressly

provide repeal of the alimony rules apply

• Repeal Of ACA Individual Mandate:

–Effective for months beginning after December 31, 2018

–Amount owed by any taxpayer under the individual health insurance mandate for

lack of minimum health insurance for themselves and their dependents is zero

– Individual mandate began in 2014 and imposed a penalty on individuals for each

month they failed to maintain minimum essential coverage

–No other Affordable Care Act provision is affected and certain employers are still

required to offer their employees minimum essential coverage



Individual AMT Retained, With Higher AMT Exemption Amounts:

–Exemption amount and phaseout threshold for individuals temporarily increased

for years 2018 through 2025

–Regular tax deductions repealed, already not deductible for AMT

• State and local tax deduction

• Miscellaneous itemized deduction

–AMT exemption amounts (adjusted annually for inflation)

• $109,400 for married filing jointly (previously $84,500)

• $70,300 for single or head of household (previously $54,300)

Child Tax Credit Increased; Partial Credit For Non-child Dependents:

–Temporarily expanded for tax years 2018 through 2025

–Credit amount increased to $2,000 per qualifying child (previously $1,000)

• Qualifying child must not have attained the age of 17 by the end of the year

–$500 nonrefundable credit for qualifying dependents other than children

(previously no credit)

–The maximum amount refundable may not exceed $1,400 per qualifying child

–AGI threshold for credit phaseout

• $400,000 for married filing jointly (previously $110,000)

• $200,000 for single or head of household (previously $75,000)



Estate And Gift Tax Retained, With Increased Exemption

Amount:

–Basic exclusion amount for the federal estate and gift taxes is

doubled from $5 million to $10 million (before adjustment for

inflation) temporarily for decedents dying and gifts made for tax

years 2018 through 2025

–Inflated amount for 2018 is 11.2 million

–This period provides the opportunity for individuals with large

estates to make gifts, especially if they had used up their existing

exclusion amounts

–Will the states follow suit?




CORPORATE

Corporate Income Tax Rate:

–21% Flat Rate

–No Special Rate For Personal Service Corporations

Alternative Minimum Tax:

–Repealed For Tax Years Beginning After December 31, 2017.

–Minimum Tax Credit Is Refundable In Tax Years 2018 Through 2021.


CORPORATE

Exclusions From Contributions To Capital:

Exceptions from tax-free corporate capital contributions were expanded

to include:

–Any contribution in aid of construction from a customer or potential

customer,

–Any contribution by a governmental entity or civic group.

Municipal tax abatements to a business to locate in a municipality are not

capital contributions and are not taxable.


OTHER BUSINESS CHANGES

Excess business loss:

Excess business losses for noncorporate taxpayers are not allowed for the tax year

Excess business loss = excess of taxpayer’s aggregate deductions for tax year attributable to the taxpayer’s trades or businesses over sum of:

–Taxpayer’s aggregate gross income/gain for the tax year attributable to those trades or businesses, plus

–$250,000 ($500,000 for joint return)



Excess business loss:

Excess business loss incurred during a tax year is treated as a net operating loss carryforward in later tax years.

–Applies to all aggregate income and deductions from all of a taxpayer’s trades or businesses.

–Combine all such income and deductions from both spouses on a joint return.

Ordering rules:

1st – apply passive loss rules

2nd – apply excess business loss rules



Example:

Spouses R and T file a joint return. R and T each have a

separate trade or business.



•Partnerships & S corporations – excess business

loss rules apply at the partner/shareholder level

•Rules apply to noncorporate taxpayers for tax

years beginning after 12/31/2017 and before

01/01/2026.



Business Interest Deduction Limitation:

Business interest deduction limit =>

30% adjusted taxable income + business interest income

Disallowed business interest expense carries forward indefinitely (except for partnerships and s corporations).

Exceptions:

Small businesses - 100% business interest is deductible if average annual gross receipts for 3 prior tax years is less than $25 million.

Real property trade or business may elect out if it uses ADS depreciation methods on real property.

Partnerships And S Corporations:

Business interest deduction limit is determined at the entity level.

Excess business interest and excess taxable income are passed through to partners/shareholders for offset in future years.



Net Operating Loss:

• NOL carryforward for an indefinite period

• NOL carryback is eliminated except for farm losses and certain

insurance companies

• NOL deduction = lesser of

–Total NOL carryforwards to the tax year plus NOL carrybacks to the tax

year; or

–80% of taxable income, computed without regard to the NOL deduction



Modifications To Taxable Income To Compute NOL For Current Tax Year:

• No deduction for 20% of qualified business income

• No deduction for foreign-derived intangible income

• No deduction for capital losses in excess of capital gains

• Sec 1202 50% gain exclusion on sale of small business stock held for at

least 5 years is not allowed

• Nonbusiness deductions limited to nonbusiness income

• Corporate dividends received deduction is computed without regard to

percentage limitations

Please note: There are additional rules for farming businesses and

insurance companies



Other Adjustments:

• Domestic production activities deduction repealed

–The domestic production activities deduction under Code Sec. 199 is repealed for tax years beginning after 2017

• Like-kind exchange treatment limited

–Like-kind exchanges are allowed only for real property after 2017–Like-kind exchanges are no longer allowed for depreciable tangible

personal property and intangible and non-depreciable personal property after 2017

• Five-year write-off of specified research or experimentation expenses

–R&D expenditures paid or accrued after 2021 must be amortized ratably over five years

–Software development costs are treated as R&D expenditures for purposes of the amortization provision

–R&D expenditures attributable to foreign research are amortized over 15 years

–Current law through 2021 allows current expensing of R&D–R&D credit remains unchanged



Business Deductions:

• Meals and Entertainment

–No deduction for entertainment expenses paid or incurred after December 31, 2017.

–Business meals are still 50% deductible.

• Employer-provided Meals

–50% deductible for expenses paid or incurred after December 31, 2017 and before January 1, 2026.

–Nondeductible after December 31, 2025.

• Transportation And Commuting Benefits:

–No deduction for any qualified transportation fringe benefits paid or incurred after December 31, 2017.

• Deductions Permitted:

–Expenses necessary to ensure the employee’s safety.

–Qualified bicycle commuting benefits that are includible in the employee’s gross income (during tax years 2018 – 2025).



Excess Employee Compensation Deduction Limit:

Generally, public companies may not deduct compensation over $1 million for covered employees.

–Regarding the definition of “publicly held corporation”, the conference committee report for the TCJA states “[t]he proposed definition may include certain additional corporations that are not publicly traded, such as large private C or S Corporations.”

Tax Cuts and Jobs Act expanded the definitions of compensation and

covered employees that are subject to the deduction limits.

Performance-based compensation and commissions are included in

total compensation subject to the deduction limit.



Covered Employees Include:

• Principal Executive Officer (PEO), or individual acting in such capacity,

at any time during the year,

• Principal Financial Officer (PFO), or individual acting in such capacity, at

any time during the year,

• Three (3) highest compensated officers other than the PEO and PFO,

• Any covered employee for any tax year beginning after December 31,

2016,

• Any compensation paid to an employee’s estate or beneficiary after the

employee’s death, or to an ex-spouse under a qualified domestic

relations order.



Business Tax Credits:

• Rehabilitation credit limited

–20% credit for qualified rehabilitation expenditures for certified historic

structures is now claimed ratably over a five-year period instead of all

in the year placed in service beginning in tax year 2018

–10% credit for qualified rehabilitation expenditures for non-historic

structures first placed in service before 1936 is eliminated beginning in

tax year 2018



Accounting Method:

• Cash method of accounting

–A simplified $25 million gross receipts test beginning with tax year

2018 to determine whether taxpayers are:

• Able to use the cash method of accounting

• Not required to capitalize inventory

• Not required to apply the UNICAP rules

• Not required to use percentage of completion method for small construction contracts

–Taxpayer must apply for a change in accounting method on form 3115

to adopt any of the new methods


PASS-THROUGH ENTITIES

New Deduction For Pass-through Income:

•New IRC sec 199A – qualified business income

Beginning in 2018 (until 2025) a 20% deduction is allowed for qualified business income (QBI)

•Deduction is allowed for taxpayers other than C corporations – which includes –

–Unincorporated businesses/sole proprietorships

–Individual owners of partnerships

–Individual owners of S corporations

–Trusts and estates



The amount allowed as a deduction is the sum of:

The lesser of:

–Combined qualified business income amount –• 20% of qualified business income (QBI) – plus

• 20% of qualified REIT dividends and qualified publicly traded partnership income – or –

–20% of the excess of taxable income over net capital gains

Plus the lesser of:–20% of qualified cooperative dividends – Or –

–Excess of taxable income over net capital gains



The amount allowed as a deduction is further limited to the excess of:

50% of the W-2 wages of the business– or –

The sum of –

–25% of W-2 wages, plus

–2.5% of the unadjusted basis of tangible, depreciable property

(including real estate) the depreciable period for which has not

ended



Exceptions – The Deduction Is Not Allowed For:

• Service businesses – any trade or business where the principal asset is

the reputation or skill of one or more individuals – for example, the

fields of health, law, accounting, actuarial science, performing arts,

consulting, athletics, financial services, brokerage and investment

management services

• Architects and engineers are specifically excluded from the definition of

service businesses


The service business exception and the 50% of W-2 wages/2.5% of tangible property limitations do not apply if taxable income is–

• Below $315,000 for married individuals filing joint (phased out between $315,000-$415,000)

• Below $157,500 for other individuals (phased out between $157,500-$207,500)



20% deduction reduces taxable income (not allowed in

computing adjusted gross income or AGI)


EXAMPLE:



Repeal Of Partnership Technical Termination:

Beginning in 2018, new tax law repeals technical terminations

under code sec 708(b)(1)(b)

Under prior law, a partnership was considered terminated

(requiring filing of a separate return) if, within any 12-month

period, there was a sale or exchange of 50% or more of interests

in the partnership



Carried Interests - New Holding Period Requirement:

• A carried interest is a profits interest generally received in exchange for

services

• Beginning in 2018, a 3-year holding period is required for capital gain

treatment


COST RECOVERY

Increased Code Section 179 Expensing:

The provision modifies section 179 to:

• Increase the maximum amount a taxpayer may expense to $1 million

(currently $500,000) for taxable years beginning before January 1, 2023;

• Increase the phase-out threshold amount to $2.5 million (currently $2

million) for taxable years beginning before January 1, 2023;

• Index the amounts for inflation after 2018, and

• Expand the definition of qualified real property to include qualified

energy efficient heating and air-conditioning property acquired and

placed in service by the taxpayer after November 2, 2017

• Maximum amount for SUV’s over 6,000 lbs. remains $25,000 but will be

indexed after 2018


COST RECOVERY

Temporary 100% Cost Recovery Of Qualifying Business

Assets:

Allows full and immediate expensing of short-lived

capital investments for five years.

–Acquired and placed in service after September 27, 2017 and before

January 1, 2023

–No longer required to be “original use property” however it must be the

taxpayers’ first use


COST RECOVERY

First-year bonus depreciation:

100% bonus depreciation would apply to qualified property acquired and placed in service on or after September 28, 2017.

For the 2017 tax year, taxpayers can choose to simplify their bonus depreciation calculation by electing to apply 50% bonus depreciation to all assets placed in service that year in lieu of applying 50% bonus to assets placed in service before September 28, 2017 and 100% bonus to assets placed in service on or after September 28, 2017.

• In later years, the first-year bonus depreciation deduction phases down, as follows:

– 80% for property placed in service after December 31, 2022 and before Jan. 1, 2024.




For certain property with longer production periods, the beginning and end dates in the list above are increased by one year. For example, bonus first-year depreciation is 80% for long-production-period property placed in service after December 31, 2023 and before January 1, 2025.

First-year bonus depreciation sunsets after 2026.


COST RECOVERY

Recovery Period For Real Property Shortened:

• Qualified improvement property (QIP) is any improvement to an

interior portion of a building that is nonresidential real property if

such improvement is placed in service after the date such building

was first placed in service.

–QIP placed in service after December 31, 2017, is generally

depreciable over 15 years using the straight-line method and half-year

convention, without regard to whether the improvements are property

subject to a lease, placed in service more than three years after the

date the building was first placed in service, or made to a restaurant

building.

Qualified improvement property does not include any expenses attributable to the

enlargement of the building, an elevator or escalator, or the internal structural framework

of the building. These types of additions must be depreciated over the life of the

underlying business.


COST RECOVERY

Depreciation Limits Of Listed Property:

• Section 280F has been amended to increase the annual depreciation

limits on passenger autos placed into service after December 31, 2017,

leading to annual limits of:

–$10,000 for the 1st year,

–$16,000 for the 2nd year,

–$9,600 for the 3rd year,

–$5,760 for each remaining year in the recovery period.

–The taxpayer is then entitled to deduct $5,760 each year until the auto is

fully depreciated.


COST RECOVERY

Recovery Period For Real Property Shortened:

• For property placed in service after December 31, 2017, the ADS

recovery period for residential rental property is shortened from 40

years to 30 years.

• For tax years beginning after December 31, 2017, an electing

farming business— I.E., A farming business electing out of the

limitation on the deduction for interest—must use ADS to depreciate

any property with a recovery period of 10 years or more.


Government & Nonprofit

Tax Reform: Key Changes and New Provisions