THE EFFECTS OFTAX REFORM The most significant tax changes in 30 years prompt questions, concerns & new strategies

TABLE of EXPERTS

S P O N S O R S

ModeratorDENNIS TOMORSKY President and CEO of the Wisconsin Institute of CPAs

Dennis Tomorsky, CPA, JD, CGMA is President and CEO of the Wisconsin Institute of CPAs. Prior to 2006, he practiced law as shareholder with the Milwaukee law firms of Godfrey & Kahn S.C. and Davis & Kuelthau, s.c., and as a CPA with the Deloitte and PWC international CPA firms.

JOHN SALZA RSM

John F. Salza, JD, is lead principal of RSM’s Milwaukee tax practice and provides federal tax consultation to a variety of clients in the manufacturing, retail, distribution, technology and services industries. He specializes in tax accounting methods, business entity selection, mergers and acquisitions, tax due diligence, IRS controversy matters and transaction cost studies. He has practiced in public accounting for nearly 25 years and has the depth of experience necessary to help clients navigate new challenges presented by ongoing tax reform.

RYAN CORCORAN RSM

Ryan Corcoran, CPA, MST, is RSM’s Great Lakes accounting methods practice leader. He works with taxpayers to implement strategies to optimize recognition of income and expense. Ryan is an RSM subject matter expert for revenue recognition, leasing and depreciation. He also leads the firm’s tax impacts of revenue recognition working group and is active in both the AICPA and ABA.

ROBERT A. MATHERSvon Briesen & Roper, s.c.

Robert A. Mathers, J.D., CPA, is a Shareholder and Chair of the Tax Law Section at von Briesen & Roper, s.c. Bob is AICPA Accredited in Business Valuation (ABV) and is an AICPA Personal Financial Specialist (PFS). He leverages his prior experience as one of the country’s largest CPA firm’s National Tax Director, and CEO of its Wealth Management subsidiary, to provide tax and transactional guidance to businesses and individual clients. He regularly provides guidance to CPA firms, financial services firms, and the accounting and investment advisory industries.

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Last year’s tax-reform legislation has turned the 2018 tax season into one of the most challenging

tax preparation seasons in recent history. Because of the reforms, many companies are not only reviewing their 2017 tax accounting, but are making fundamental decisions on how they should move forward strategically. The Milwaukee Business Journal recently assembled a panel of experts to explore what business owners should know about the new tax law and how it may impact their past, present and future.

to sell the business, particularly

in the short term, they may not

want the C corp structure due to

the potential double taxation that

would result in a sale of assets.

MATHERS: I recommend

caution when considering a

conversion, because there can

be some unintended, long-

term consequences. For one

thing, clients may be surprised

to learn they can only retain up

to $250,000 of earnings. When

I graduated from law school,

the accumulated corporate

earnings tax was something that

only impacted large Fortune

500 companies, today it may

affect many of our family-owned

businesses. I have fought this

in audit many times, and I can

tell you that the documentation

requirements are significant.

SALZA: I agree. In my own

25 years of practice, we

never thought much about

the accumulated earnings

tax, under Section 531, but it

becomes much more relevant

now in the C corporation

conversion environment. And the

accumulated earnings tax is not

a self-imposed tax. This happens

during an exam (a government

audit) and that is why it can be

very difficult.

MATHERS: Another concern about

C corporations is the Schedule

UTP (Uncertain Tax Positions),

where you have to detail any

uncertain tax positions you’re

taking that the IRS might later

determine to be non-compliant

with the tax code. That used to be

required of companies with $100

million in assets, but now affects

companies with $10 million in

assets. That’s impacting a lot of

mom-and-pop businesses.

CORCORAN: When

you focus only on

the tax rates, the

entity choice

looks rather

straight-

forward,

but it’s not.

One of the

challenges

is

educating

owners

of flow-

throughs about what converting

to a C corporation means. For

example, when you take money

out of a C corporation, it’s a

taxable dividend, not a tax-

free distribution. You will also

have deferred income taxes to

worry about, and you will have to

consider corporate due dates for

your estimated federal and state

tax payments.

TOMORSKY: ARE THERE OTHER STRATEGIC DECISIONS COMPANIES SHOULD BE CONSIDERING BECAUSE OF THE TAX REFORM LEGISLATION?

CORCORAN: In addition to

tax reform, there are financial

statement standards coming on

line that will impact how almost

every single company recognizes

revenue. We’re already there for

public companies, and private

companies will be there in 2019.

There are also changes to how

leases have to be reported on

balance sheets. Those changes

could impact debt ratios,

covenants and all of the analytics

that go into calculating your cost

of capital.

SALZA: Many of our clients

have some type of international

operations. Converting to a C corp

is going to impact those entities

as well with regard to taxation

on foreign earnings, foreign

tax credits and the new tax on

foreign-derived intangible income.

The issue becomes whether,

going forward, the international

businesses should be treated as

disregarded entities or controlled

foreign corporations. Companies

may also want to consider a new

parent company structure.

“One of the things you want to focus on now are strategies to add basis to assets that are being transferred to the next generation.”ROBERT A. MATHERSvon Briesen & Roper, s.c.

DENNIS TOMORSKY: WHAT’S LIFE BEEN LIKE SINCE THE TAX REFORM LEGISLATION PASSED? HOW MUCH MORE INTENSE HAS IT MADE THE ALREADY INTENSE TAX SEASON?

JOHN SALZA: It’s been extremely

busy, because entirely new

sections have been written into

the internal revenue code. The

legislation has also precipitated

tax opportunities for the 2017

tax year, including accelerated

deductions and expensing of

certain assets purchased at year-

end. On top of that, there’s the

need to do strategic planning for

2018, including possible entity

conversions.

RYAN CORCORAN: Our clients are

very aware of changes in the tax

law and are asking very specific

questions. It makes for a very

intense tax season, because you’re

focused on closing the books

for 2017, completing returns, the

split effective date of some of

the depreciation provisions, and

getting ready for the changes that

take effect in 2018.

ROBERT MATHERS: Since 2016,

there has been a tremendous

pendulum swing away from more

regulation and toward more

flexibility. The presidential election

surprised a lot of people and

changed a lot of things. What

was good advice in 2016 has been

turned on its ear. That’s created

a lot of uncertainty and a lot of

questions.

TOMORSKY: THE CHANGE IN THE CORPORATE TAX RATE IS CAUSING MANY COMPANIES, ESPECIALLY CLOSELY HELD FIRMS, TO RETHINK WHETHER THEY SHOULD CONVERT FROM AN S CORP. OR LLC TO A REGULAR C CORPORATION. UNDER WHAT TYPES OF SCENARIOS DO YOU THINK SERIOUS CONSIDERATION OF A CONVERSION WOULD BE WARRANTED?

SALZA: This is an issue that is

being raised by virtually all of our

flow-through clients because of

the historic rate cut that

reduced the

corporate

rate from 35

to 21 percent.

They’re

wondering

if they

should

be a C

corporation,

which is

something

they never

considered

before. The

answer depends on the business’s

objectives. Companies that are

looking to grow their business by

retaining cash so they can make

investments, capital expenditures,

expand, acquire other businesses

or pay off debt should give very

serious consideration to switching

to a C corp. But, if they are looking

16 MILWAUKEE BUSINESS JOURNAL

TOMORSKY: MANY COMPANIES ARE FOCUSING ON TAX REFORM’S IMPACT ON THEM NEXT YEAR, BUT THERE ARE THINGS THEY CAN DO TO BENEFIT FROM THEM NOW, CORRECT? WHAT ARE THEY?

CORCORAN: The IRS

allows

taxpayers

to change

their tax

method of

accounting,

which is basically

the timing of

when revenue

and expense

items are

recognized for

income tax purposes. There are

about 180 different changes that

can be filed through the extended

due date of the 2017 return,

which is October 15 for most C

corps. That’s important this year,

because you could accelerate

a deduction and take it at the

35-percent rate in effect for

2017 returns, as opposed to the

21-percent rate for 2018 returns.

It’s a really good opportunity for

companies.

MATHERS: For our family-owned

business clients, the best gift they

can give their family because of

the new tax law is “basis,” which

is the amount

that is “at risk”

of a stock or

asset used

for calculating

taxes. We won’t

want to lose

sight that

the current

$10 million

estate tax

exemption

is going to

sunset at the

end of 2025

to approximately

$6 million. One of the things

you want to focus on now are

strategies to add basis to assets

that are being transferred to the

next generation.

TOMORSKY: TAX REFORM INCLUDES SOME SIGNIFICANT CHANGES IN THE WAY DEPRECIATION IS HANDLED. WHAT ARE THOSE CHANGES

vonbriesen.com/tax

Timothy A. Nettesheim, J.D., LL.M.

Thomas J. Phillips, J.D., LL.M.

Katelyn A. Pellitteri, J.D.

Randy S. Nelson, J.D., CPA

David J. Roettgers, J.D., CPA

Steven M. Szymanski, J.D., MBA

Daniel S. Welytok, J.D., LL.M.

Robert B. Teuber, J.D.

John A. Sikora, J.D.

Peter J. White, J.D., CPA

Robert E. Dallman, J.D., LL.M.

Megan K. Heinzelman,

J.D., LL.M.

Thomas P. Guszkowski,

J.D., LL.M.

Terri S. Boxer, J.D.

Courtney A. Hollander, J.D.

Thomas J. Kammerait,

J.D., CPA

Robert A. Mathers, J.D., CPA

Section Chair

Marcus S. Loden, J.D., LL.M.

Megan L.W. Jerabek, J.D.

Thomas A. Myers, J.D.

New Tax Law.

Experienced Tax Lawyers.

von Briesen’s team of experienced tax lawyers,

many of whom have advanced designations,

help businesses and individuals navigate the

new tax law.

The bottom line? We get results.

To learn more about our Tax Law Section

and the services we offer, please contact

Robert Mathers, Tax Section Chair, at

rmathers@vonbriesen.com.

AND WHAT CAN BUSINESSES DO TO BENEFIT FROM THEM?

CORCORAN: I think the

100-percent bonus depreciation

provisions for assets acquired

and placed in service after Sept.

27, 2017 are excellent, especially

for longer-life property, but there

are special rules that you have to

follow. Also, the ability to now use

bonus depreciation on used assets

versus only new assets previously,

is huge.

MATHERS: The new law will also

allow buyers to basically expense

much of the purchase price.

Because of the more aggressive

tax depreciation schedule, buyers

have a much higher internal rate

of return. Does that mean sellers

might ask for higher multiples?

The answer is “yes” in some

instances.

CORCORAN: Not all buyers will

want to 100-percent expense,

because they will have already

written off the cost when they

go to sell and will have no basis

to offset any gains. It really

depends on how long the buyer

plans to own the company. There

are also questions with leases

and partnership transactions. If a

partner exits, is the payout eligible

for immediate expensing? What

about a 355 spinoff?

TOMORSKY: A LOT OF BUSINESS OWNERS ARE AT THE AGE WHERE THEY ARE LOOKING TO SELL THEIR BUSINESSES. HOW IS TAX REFORM IMPACTING BUYING AND SELLING DECISIONS?

SALZA: For buyers, while the

cash tax value of a tax basis step-

up has decreased because of

lower tax rates, the value of the

tax basis step up generally would

increase because of the immediate

expensing of fixed assets and the

smaller gross-up paid to the sellers.

Those buyers who historically may

have not been willing to pay the

gross up to the seller for purchasing

assets may now be willing to pay

additional consideration because of

the immediate tax benefits (current

expensing of assets). In terms

of tax due diligence, federal tax

exposures will generally decrease

and thus materiality thresholds

will have to be evaluated in light

of the new tax rates. Deferred tax

assets and tax provisions in general

become more critical when making

acquisitions decisions.

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MARCH 23, 2018 SPECIAL ADVERTISING SECTION 17

MATHERS: The due diligence push

is going to get greater, but it’s not

just tax reform. We are in a white-

hot market. Tax reform just added

more jet fuel onto an already hot

flame. I agree that there will be

more searching for deferred tax

assets that might be beneficial to

the buyer. You might be able to

buy a company, expense it, and

step into the shoes of a very nice

differed tax asset.

TOMORSKY: WHAT AREAS OF THE TAX REFORM PACKAGE ARE CAUSING THE MOST CONFUSION OR UNCERTAINTY?

CORCORAN: I think the speed with

which it came out is generating

a lot of uncertainty. The House

blueprint came out in June 2016

and president-elect Trump’s team

circulated their plan in late 2016.

They kind of converged the two,

but the actual legislation did not

come out until November 2017 and

then signed Dec. 23. It’s been a

very short time span to digest the

law and how all of the provisions

interact with each other.

MATHERS: The 20-percent

deduction for pass-throughs is

causing confusion, because it

integrates compensation with how

much the companies make. I can’t

remember any tax legislation that

has created so much confusion for

our clients.

SALZA: I totally agree. There

are qualitative and quantitative

factors in the legislation that

relate to the

individual’s

taxable

income,

which is

really

unique

and can

produce

anomalous

results. An S

corp shareholder who

is below the income

threshold may get a

lower deduction than

partnerships and sole proprietors,

because they have a reasonable

compensation expense that the

other entities may not have. But

if they’re above the threshold

where the wage and asset-base

limitations kick in, they may

actually get a larger tax benefit.

I don’t think that was the intent

of this legislation. The intent was

to preserve the rate differential

We’re up to speed, so you can go full speed.

SEE CHALLENGES BEFORE THEY’RE CHALLENGING.

To make confident decisions about the future, middle market leaders need a different kind of advisor. One who starts by understanding where you want to go and then brings the ideas and insights of an experienced global team to help get you there.

Experience the power of being understood. Experience RSM.

www.rsmus.com/milwaukee

RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International.

benefits for flow-through

companies. But instead of doing

it the simple way by applying

a flat-tax rate to flow-through

entities like the House version

did, they enacted an entirely new

section 199A that produces these

anomalous results.

CORCORAN: Another

issue we are seeing

is the interest

expensing

limitation.

This can

change

everything

for a highly

leveraged

company

going

into 2018,

because they

won’t be able to deduct some of

the interest on the loans they’re

using to finance the acquisition.

A lot of companies may face a

financial whipsaw because their

models were based on one thing,

and now everything is different.

MATHERS: I think many people

are going to be surprised that the

standard deduction will about

double (to $24,000) on personal

tax returns, and that there will

be a $10,000 cap on state and

local taxes. I think there will be

a lot of surprises for closely held

businesses that have flow-through

operations when they go to do

their personal taxes.

SALZA: There will be people

paying more taxes in 2018. No

question about it.

TOMORSKY: I HAVE HEARD A LITTLE ABOUT WORK-AROUNDS, WHERE PEOPLE ARE TRYING TO USE THINGS LIKE COOPERATIVES, WHICH HISTORICALLY WERE ASSOCIATED WITH THE AGRICULTURAL SIDE OF THE ECONOMY. FOLKS ARE FINDING OPPORTUNITIES TO CONVERT PROFESSIONAL SERVICE BUSINESS INTO CO-OPS IN ORDER TO DO SOME THINGS. ANY THOUGHTS ON THAT?

MATHERS: It was an un-intended

consequence. There will be some

legislative changes to correct that

issue. I know professional journals

are starting to pick up on the idea

that every business can be a co-op

and that is just not the case.

SALZA: The IC-DISC can also be

an issue. An IC-DISC, or domestic

international sale corporation,

is used by flow-through entities,

because it can be a tax-preferred

way to get cash out of the

company. It allows companies

with exports to pay a commission

expense that is then paid as

a dividend to shareholders at

preferred tax rates. C corporations,

however, cannot directly own an

IC-DISC, so you have to set up a

sister corporation with the same

shareholders.

TOMORSKY: WHEN ALL IS SAID AND DONE, HOW TRANSFORMATIVE DO YOU THINK THESE TAX REFORMS WILL BE AND DO YOU THINK THEY WILL BE A NET POSITIVE OR NEGATIVE FOR THE ECONOMY? OR IS IT JUST A WILD GUESS?

CORCORAN: It’s good for the

economy, because decreasing

company taxes may result in

higher wages, hiring and more

capital investments. But as Bob

was saying earlier, tax reform

was like putting jet fuel on an

already strong economy. Because

we are providing all of these tax

incentives now, will we have any

tools left to boost the economy if

it slows down?

MATHERS: We live in a great

time right now for closely held

businesses, which drive 67 percent

of our country’s GDP. This is

the most major change in tax

legislation since the 1980s, and I

don’t think there has ever been a

greater time to start up a business.

“It’s good for the economy, because decreasing company taxes may result in higher wages, hiring and more capital investments.”RYAN CORCORAN RSM

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