Business and Individual Tax Update

A Deeper Dive into the Revenue Recognition Process Part Two: Variable ConsiderationPRESENTED BY:
November 13, 2018
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Agenda
› Individual tax reform › QBID › C vs. S › Other business tax reform and planning
What do you think about tax reform?
GOOD NEUTRAL BAD
Tax Reform Landscape
› There were two compelling reasons for tax reform: › Simplification for individuals
- Too many complicated analysis as it relates to itemized deductions, credits/deductions for college and many other special rules
- Postcard filing? › Ability for the U.S. to compete in the global market
- U.S. had one of the highest corporate income tax rates in the world - Only country that taxed worldwide income
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› The Tax Cuts & Jobs Act signed into law on Dec. 22, 2017 › Most significant tax legislation since 1986 › Many new concepts and limits › Need to relook at entity type › Many opportunities for planning › No one-size-fits-all solutions
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But don’t forget old law too fast…
Individual tax reform changes sunset after 2025,
at which point old tax law comes back into force.
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Individual Tax Rate Changes – Married Filing Jointly
Income Range Old Law New Law Change $0 to $19,050 10% 10% None $19,050 to $77,400 15% 12% Decrease $77,400 to $156,150 25% 22% Decrease $156,150 to $165,000 28% 22% Decrease $165,000 to $237,950 28% 24% Decrease $237,950 to $315,000 33% 24% Decrease $315,000 to $400,000 33% 32% Decrease $400,000 to $424,950 33% 35% Increase $424,950 to $480,050 35% 35% None $480,050 to $600,000 39.6% 35% Decrease $600,000 and over 39.6% 37% Decrease
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Individual Tax Rate Changes – Single
Income Range Old Law New Law Change $0 to $9,525 10% 10% None $9,525 to $38,700 15% 12% Decrease $38,700 to $82,500 25% 22% Decrease $82,500 to $93,700 25% 24% Decrease $93,700 to $157,500 28% 24% Decrease $157,500 to $195,450 28% 32% Increase $195,450 to $200,000 33% 32% Decrease $200,000 to $424,950 33% 35% Increase $424,950 to $426,700 35% 35% None $426,700 to $500,000 39.6% 35% Decrease $500,000 and over 39.6% 37% Decrease
Sheet1
MFJ
› Standard deduction not quite doubled - Single/Separate: $12,000 - Joint: $24,000 - HOH: $18,000
› Personal exemptions eliminated › Child and family credit expanded
- $2,000 per qualifying child under 17 ($1,000 in 2017) - Phase-out increased to $400,000 for joint filers (used to be $110,000) - $500 credit for other dependents (new in 2018)
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Individual Itemized Deductions
› State and local taxes, including income taxes, real estate taxes and personal property taxes, limited to $10,000 - Anti-abuse provision in 2017 eliminates deduction in 2017 for
prepayments of state and local income taxes for tax years in 2018 and beyond
› Many states have tried to come up with work-arounds that involve charitable contributions; but IRS has shot them down
› Charitable contribution AGI percentage limitation increased from 50% to 60% for cash contributions
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› Mortgage interest expense limited on new acquisition debt in excess of $750,000
› Changes made to the deductibility of home equity interest - Still deductible ONLY if used to improve the home - $100,000 limit removed and now part of overall $750,000 limit - IRS released IR 2018-32 to clarify
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› Personal casualty losses eliminated, except for federal disaster areas › Medical expenses AGI threshold reduced from 10% to 7.5% for 2017
and 2018 (reverts in 2019) › Miscellaneous 2% deductions eliminated
- Investment fees, job expenses, tax preparation fees, etc. › Pease limitation eliminated (overall itemized limitation)
- Effectively used to be an additional 1% to 1.2% surtax on joint incomes over $313,800
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Individual Alternative Minimum Tax (AMT)
› Modified but not repealed as initially discussed › AMT exemption increased › AMT phase-out increased › Result:
- Itemized deduction limitations (notably state and local taxes) will result in fewer AMT addbacks
- Far fewer taxpayers subject to AMT - Possible benefit from minimum tax credits from prior years
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Individual Miscellaneous Changes
› Kiddie tax simplified but subject to trust tax rates - 37% rate on income over $12,500
› Roth re-characterizations no longer allowed to undo a Roth conversion
› Alimony paid deduction eliminated for divorces executed after 12/31/18 - Could see more divorces in 2018
› Moving expenses eliminated › 529 “college” savings plans will allow up to $10,000 for “qualified
expenses” for elementary and high school
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› New Code Section 199A › 20% Small Business Deduction
- Available to qualified trade or business operated as flow-through (i.e., S Corps, Partnerships and sole proprietorships)
- Claimed at the individual (or estate or trust) level - Deduction from AGI - Not a basis reduction
- Drops highest ordinary rate from 37% to 29.6% - Provide parity with corporate income tax rate cut
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athletics, financial services and brokerage - Principal asset reputation or skill of one or more owner employees
- Proposed regs limit application to: - Receives income for endorsing products or services - Licenses or receives income for use of image or likeness - Receives fees for appearing at an event or radio, television or other
media › Investment businesses excluded
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Qualified Business Income Deduction
› Deduction limited to lesser of: - 20% of modified taxable income or - the greater of:
- 50% of W-2 wages or - 25% of W-2 wages and 2.5% of capital amount
› Special rules for lower income taxpayers › Not deductible for self-employment taxes › Trade or business determined under IRC 162(a)
- Rental or licensing of tangible or intangible property to related T or B to qualify - Residential rental 162 rules and case law factors apply
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Business Tax Rate Change
› Effective for 1/1/18 the corporate tax rate will be 21% › Fiscal years will calculate tax under Section 15
- Tax to be calculated using both the old and the new rates on the full- year taxable income then prorate the two amounts based on days
› Dividends received deductions for domestic dividends are right-sized for rate change - 80% exclusion becomes 65% - 70% exclusion becomes 50% - New income limitations apply
› Business AMT repealed
C vs. S
› With the new lower corporate tax rate many considering converting to C Corp: - In addition to lower tax rate, other areas where more favorable
treatment as C Corp - Owner fringe benefits - Avoid AMT - Choose any fiscal year - State taxes deductible without limit - Compliance less cumbersome - Ohio doesn’t have corporate income tax
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C vs. S
› But need careful analysis - Double tax still applies - 39.8% federal - Need to examine tax brackets
- MFJ taxpayers using standard deduction don’t rise above a 21% rate until AGI of $402,500
- Assuming full utilization of the qualified business income deduction, MFJ taxpayers 21% effective rate not reached until $808,000 of AGI
- Ramifications of revoking S - 5 years to re elect S - BIG exposure
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Business Section 179 & Depreciation
› Section 179 increases to $1 million with higher phase out - Certain improvements to buildings qualify (e.g., roofs, HVAC, alarm systems, etc.) - Qualified Expenditure Limitation – the expense limitation is reduced for every
$1 over $2,500,000 of qualified assets acquired in the taxable year › Bonus depreciation increases to 100% for property placed in service after
9/27/17 and before 1/1/23 - Rate phases down after 12/31/22 by 20% per year - Eligibility broadened to include used property/new-to-taxpayer rule - Known qualified improvement property issue - qualifies for 179, but does not
qualify for bonus or 15-year write off - Qualified leasehold, restaurant and retail improvements removed
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Business Tax Planning
› Depreciation limits increased on luxury autos › Any auto above 19,000 FMV subject to limits › Tax reform increases annual depreciation limits:
- First year $3,160 to $10,000 - $8,000 increase in first year cap if bonus depreciation is claimed,
i.e., $18,000 total first year expense - Second year $5,100 to $16,000 - Third year $3,050 to $9,600 - Thereafter $1,875 to $5,760
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Repairs & Maintenance
› Keep recently enacted tangible property regs in mind › Capital property must be capitalized and depreciated unless the
property qualifies for one of the following exceptions: - Materials and supplies - Rotable and temporary spare parts - Improvements that do not result in BAR (betterment adaptation and
restoration) - Routine maintenance - Small building/small taxpayer safe harbor
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› Limitation on deductibility of business interest - Applies to all taxpayers - Deduction limited to:
- Business Interest Income + (30% of adjusted taxable income) + floor plan financing interest
- Business interest is any interest paid or accrued on debt allocated to a trade or business (T/B) of the taxpayer
- Adjusted taxable income: - Income without regard to
- Income gain or loss not allocated to a trade or business - QBID deduction - NOL
- Pre 1/1/22 add back depreciation and amortization - Post 1/1/22 no add back
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› Limitation on deductibility of business interest - Entity level computation and disallowed interest carried forward
indefinitely - Continued questions on how rules apply to tiered structures
- Disallowed expense carries forward indefinitely - Must be allocated excess taxable income in succeeding year to use
limited expense - Flow throughs waiting for definition of income/gain/deduction or loss
not properly allocated to a trade or business
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Net Operating Losses (NOLs)
› NOLs arising in a tax year ending before 12/31/17: - May be carried back 2 yrs and/or forward 20 yrs
› NOLs arising in a tax year ending after 12/31/17: - May be carried forward indefinitely
› NOLs arising in a tax year beginning after 12/31/17 may only reduce 80% of taxable income in a carryforward tax year
› NOLs carried over from years beginning before 12/31/17 can still offset 100% of taxable income in a carryforward year
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Excess Business Losses
› Limitation on deduction of excess business losses - For taxable years beginning after 12/31/17 - Applied at partner/shareholder level - Defined as the excess of
- Aggregate deductions from taxpayers T or Bs , determined without regard to whether such deductions are limited OVER the sum of the taxpayer’s aggregate gross income plus $250,000 ($500K MFJ return)
- Form 461 issued in draft - W-2 income counts as business income
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› Business deduction no longer allowed for entertainment expenses, including: - Any activity generally considered to be entertainment, amusement or recreation; - Membership dues for any club organized for pleasure, recreation or other social
purposes; or - A facility used in connection with any of the above items
› The following exceptions apply: - Expenses that are treated as compensation to an employee as wages - Expenses in connection with the performance of services for another under a
reimbursement plan - Expenses for recreational, social or similar activities primarily for the benefit of the
taxpayer’s employees, other than highly compensated employees - Expenses for business meeting of employees, clients or prospects (meals @ 50%) - Expenses for attendance at business leagues, chambers etc. (meals @ 50%)
› Effective for amounts incurred or paid after 12/31/17
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Entertainment Expenses
› Notice 2018-76 recently released provides that meals will be 50% deductible if the following 5-part test is met:
1. Meal is an ordinary and necessary expense 2. Meal is not lavish or extravagant 3. Employee (or taxpayer/owner) must be present at the meal. 4. Meal is provided to a current or potential business customer, client,
consultant or similar business contact 5. Meals provided at, before or after an entertainment event (i.e. food at a
ball game, play, golf outing, etc.) must be paid for separately from the cost of the entertainment (e.g. tickets)
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Other Employer Items
› Cash/gift cards to employees for safety or length of service now wages › Cannot deduct expenses of a qualified transportation fringe benefit:
- Bus/transit passes - Qualified parking - Qualified bicycle commuting reimbursement (only applicable after 2026 but
employee must pick up into income from 2018 through 2025) › Does not change the employee’s exclusion of the benefit from income
(except in the case of qualified bicycle commuting reimbursements as noted above)
› Moving expense reimbursements includible as wages to the employee
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and economically distressed communities - Taxpayers defer paying tax on capital gains by investing in qualified
opportunity funds - Taxpayer with realized capital gain from unrelated party has 180 days
to invest in QO fund - Taxpayer defers the original gain to the earlier of 3 events
- Sale of QO fund interest - QO fund ceases to qualify - 12/31/2026
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Opportunity Zones
› Original deferred gain reduced based on how long QO Zone Fund held - Investment held 5-7 years, original deferred gain reduced by 10% - Investment held for 7 or more years, original deferred gain reduced by
15% › Post-acquisition appreciation on investment in QO Fund is
permanently excluded from taxation if held for 10 years or longer › Census tracts that are QO Zones are identified and fixed
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Partnership Provisions
› Technical terminations - Partnership is only terminated when no part of any business exists - No longer triggered by sale or exchange of 50% or more of the total
interest - Under pre-TCJA two returns would be filed for pre- and post-periods - Post-TCJA will have one tax return that covers straddle period - Will add complexity to managing allocations of income in pre- and
post-periods - Purchase agreements to address how allocations will work to reflect
economics
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Partnership Audit Changes
› TEFRA is repealed for audits on tax years after 12/31/17 - LLC Agreements must be updated by 3/15/19!
› Must have partnership representative IRR 301.6223-1 › Effected partnerships will pay the tax at entity level unless TMP elects out › Makes it easier for IRS to audit partnerships › Available elections:
- Opt out - Partners can only be individuals, corporations (including S Corps) and deceased
partners’ estate - Cannot issue more than 100 K-1s - Must be made annually on timely filed return
- Push out - Partner picks up their share of adjustments and pays tax
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Carried Interest
› Carried interest - Basically a profits interest for the performance of services - Pre-TCJA most often would receive an allocation of long-term capital gain triggered on
an event - TCJA added new IRC §1061
- New 3-year holding period for allocations from applicable T or B, which is defined as: - Raising or returning capital - Investing in or disposing of specified investment assets - Developing specified investment assets - Definition should capture all investment funds - Most interests issued for services provided to one portfolio company exempt - Applies to S Corporations
- Allocation is short-term capital gain if 3-year holding period not met
Thank you.
Information presented is not meant to constitute legal, accounting or other professional advice. Any action taken based on information in this presentation should be taken only after a detailed
review of the specific facts and circumstances. Information is current as of the date presented.November 13, 2018
Tracy Monroe, CPA, MT 330.255.4357 [email protected]
Business and Individual Tax Update
www.cohencpa.com
Agenda
Individual Tax Reform
Individual Tax Rate Changes – Single
Form 1040
Form 1040
Individual Miscellaneous Changes

Business and Individual Tax Update

Documents

Transcript of Business and Individual Tax Update