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Postlethwaite & Netterville, A Professional Accounting Corporation

Tax Cut and Jobs Act Bill Potter / Kathryn Pittman / Brandon Lagarde November 14, 2017

Overview

Background on Tax Reform

Tax Reform

Individual Tax

Tax Reform – Individual Rates-HB 1 Taxable Income Exceeding Rates

Single Joint Ordinary Capital Gain/Qualified Dividends

Medicare Tax on Earned Income

Medicare Tax on Net Investment Income

$0 $0 12%*

0%

2.9% 0% $38,600 $77,200

15% $45,000 $90,000 25%

$200,000 $250,000

35% $260,000

3.8% 3.8% $425,800 $479,000 20%

$500,000 $1,000,000 39.6%

Tax Reform – Individual Rates- Senate Taxable Income Exceeding Rates Single Joint Ordinary Capital

Gain/Qualified Dividends

Medicare Tax on Earned Income

Medicare Tax on NIIT

$0 $0 10% 0%

2.9% 0%

$9,525 $19,050 12%

$38,600 $77,200

15%

$38,700 $77,400 22.5%

$60,000 $120,000 25%

$170,000

32.5% $250,000

3.8% 3.8% $290,000

$200,000 $390,000 35%

$425,800 $479,000 20%

$500,000 $1,000,000 38.5%

Polling Question

8

Tax Reform – Kiddie Tax House Senate

• Slightly modified to take into account new rates • Applies trust and estate brackets to the “net unearned income”

• Earned income is taxed under normal rules

Tax Reform – Standard Deduction/PE House Senate

• Married filing joint - $24,400 • Single - $12,200 • HOH - $18,300

• Married filing joint - $24,000 • Single - $12,000 • HOH - $18,000

• Repeals personal exemptions ($4,050 for 2017)

• Repeals personal exemptions

Tax Reform – Itemized Deductions House Senate

• Repeals overall limitations on itemized deductions

• Repeals overall limitations on itemized deductions

• Mortgage interest o Limits to $500,000 o Principal residence o No home equity loan o Grandfather provision for

acquisition debt before Nov 2

• Mortgage interest o Maintains current levels o No deduction for home equity loans

• State and local tax deduction o Limited to $10,000 of property tax o No deduction even if paid in

carrying on a trade or business

• State and local tax deduction o Permitted as a deduction when paid

in carrying on a trade or business or section 212 activity

Tax Reform – Itemized Deductions House Senate

• Personal casualty loss o Repealed except for losses allowed

under special disaster relief legislation

• Personal casualty loss o Repealed except for losses incurred

in a Presidentially declared disaster

• Tax Prep fee deduction – repealed • Tax Prep fee deduction - repealed

• Miscellaneous itemized deductions – generally not repealed, except for unreimbursed employee expenses

• Miscellaneous itemized deductions – repealed o Includes unreimbursed employee

expenses

• Gambling losses – maintains gambling loss deduction but clarifies that all deductions incurred in carrying out wagering is limited to gains

• Gambling losses – similar to House bill

Tax Reform – Itemized Deductions House Senate

• Charitable contributions o Increases limit to 60% of AGI for cash

paid to public charities o Removes deduction for amounts

paid for right to purchase tickets to athletic events

• Charitable contributions o Increases limit to 60% of AGI for cash

paid to public charities o Removes deduction for amounts

paid for right to purchase tickets to athletic events

• Moving expense – repealed except for those incurred by a member of the Armed Forces

• Moving expense – repealed except for those incurred by a member of the Armed Forces

• Medical expenses – repealed • Medical expenses – maintained

• Investment interest expense – allowed • Investment interest expense – allowed

Tax Reform – Other Deductions House Senate

• Archer Medical Saving Account (MSA) deduction – repealed

• Not addressed

• Sale of Principal Residence o Changes from 2 out of 5 year test to

5 out of 8 year test

• Sale of Principal Residence o Exclude gain from sale once every 5

years

• Alimony expenses – repealed • Alimony expenses – maintained

• Other employee expenses that are allowed as above the line deductions expect those of members of military reserve and reimbursed expenses included in employee’s income

• Not addressed

Tax Reform – Fringe Benefits House Senate

• Not addressed • Qualified bicycle commuting reimbursement - repealed

• Employer provided housing exclusion limited to $50,000 and phase out completely for income over $120,000

• Not addressed

• Exclusion for employee achievement awards – repealed

• Not addressed

• Exclusion for dependent care assistance programs – repealed in 2023

• Not addressed

• Exclusion for qualified moving expense reimbursement – repealed except for active-duty members of the US Armed Forces who move pursuant to a military order

• Exclusion for qualified moving expense reimbursement – repealed

• Exclusion for adoption assistance programs – repealed

• Not addressed

Tax Reform – Retirement House Senate

• Nonqualified deferred compensation – original HB would tax upon vesting. Modified in Amendments, so treated same under current law

• Nonqualified deferred compensation – taxed upon vesting regardless of when funds are distributed to participant. Would include stock options and SARs.

• Distributions from defined benefit and state and local government plans may be withdrawn at 59 ½ without penalty.

• Not addressed

• Changes to hardship distributions o No wait to contribute o Can withdraw earnings and employer

contributions

• Not addressed

• ROTH conversions of traditional IRA and vice versa – repealed

• Not addressed

• Not addressed • Employee not allowed to make catch-up contributions if high wage earner in previous year.

Tax Reform – Education House Senate

• Consolidate education credits into one o American Opportunity o Hope Scholarship o Lifetime Learning o Expand it to the 5th year at 50%

• Not addressed

• Coverdell education savings account – repealed

• Can use 529 plan dollars for K-12 up to $10k per year

• Not addressed

• Discharge of student loan by reason of death or disability excluded from income

• Not addressed

• Student Loan interest deduction – repealed

• Not addressed

• Tuition expense deduction - repealed • Not addressed

Tax Reform – Education House Senate

• Interest on US Savings Bonds used to pay for college would be included in income.

• Not addressed

• Exclusion from income for tuition reduction available to employees of institution, spouses or dependents – repealed

• Not addressed

• Employer provided education assistance up to $5,250 is excluded - repealed

• Not addressed

Tax Reform – AMT House Senate

• REPEAL (Individual and corporate) • REPEAL (Individual and corporate)

Tax Reform – Credits House Senate

• Child Tax Credit o Increases it to $1,600, with

refundable amount of $1,000 o Child under 17 o Must have SSN for refundable o $300 nonrefundable credit – family

flexible credit – non-child dependent

o Phases out $115,000/$230,000

• Child Tax Credit o Increases it to $1,650, with

refundable amount of $1,100 o Child under 18 o Must have SSN for refundable o $500 nonrefundable credit for non-

child dependent o Phases out $500,000/$1,000,000

• Repeal all other nonrefundable credits o Credit for individuals over 65 o Retired on disability o Mortgage credit certificates o Plug-in electric motor vehicles

• Not addressed

Tax Reform – Estate/Gift/GST House Senate

• Increase the basic exclusion to $10 million, indexed for inflation

• Repeal estate and GST in 2025 • Reduced gift tax rate of 35% beginning in

2025 • Retain step up in basis at death

• Increase the basic exclusion to $10 million, indexed for inflation beginning in 2011

• Retain step up in basis

Polling Question

22

Pass-through – Business Income

Business Income House Senate

• “Business Income” – max rate of 25% instead of ordinary rate as high as 39.6% o In lieu of 12% rate, 9% rate on first $75,000 on

active owner earning less than $150,000 through a pass-through business

o Special rate phases out at $225,000 o Phased in special rate, 11% for 2018 and

2019, 10% for 2020 and 2021 and 9% after. o Single – amount is $37,500 and $75,000

• Defining “business income” – reference to capital percentage o Passive member – 100% o Active member – 30% o Certain service business – 0%

• Income not classified as “business income” is subject to ordinary rates

• Allows a deduction of 17.4% of domestic qualified business income from a partnership, S corporation or sole proprietorship

• Deduction does not apply to service businesses, except in the case of a taxpayer whose income does not exceed $150,000 (or $75,000 for single). This special treatment begins to phase out when income reaches $50,000 (or $25,000 for single).

• Deduction is limited to 50% of W-2 • Does not apply to any amount paid by an S

corporation for reasonable compensation or guaranteed payments to a partner

Business Income House Senate • “Business Income” – service business

o Capital percent is deemed to be 0% o Applies to services in the field of health, law,

engineering, architecture, accounting, actuarial science, performing arts, consulting, financial services, brokerage services or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees and certain securities and commodities trading

• Not addressed

Business Income House Senate • Can elect to determine capital percent using formula

(election irrevocable for 5 years) o Short term AFR plus 7 percent times asset

balance = specified return on capital o Specified return on capital divided by income

derived from activity determines “applicable percent” – this is used as the “capital percent”

• Not addressed

Business Income – Self Employment House Senate

• “Labor percentage” of income is “net earnings from self-employment” o Income from partnership and S

corporation subject to SE tax o No limited partner exception o No rental income exception – active real

estate investor potentially subject to SE tax • “Capital percentage” of income is not self-

employment earnings o Capital percent used in “business income”

rate calculation is used

• Not addressed

Business Income – Non-Corporate Losses House Senate

• NOLs limited to 90% of taxpayer’s income • Repeal of carryback of NOLs (special one year

carryback for small business and farming losses) • NOL carryforward increased by an interest factor • Applies to corporate and non-corporate NOLs

• NOL limited to 90% of taxable income (similar to AMT rule)

• Excess business loss not allowed in a given year and are added to NOL.

• Excess business loss is defined as the excess of deductions attributable to trade or business over the income of the taxpayer PLUS a threshold amount. o $500,000 for joint o $250,000 for single

o Example – current year business deductions are $1,000,000. Taxpayer has business income of $250,000. Taxpayers threshold amount is $500,000. Taxpayers excess business loss is $250,000. Taxpayer can use the $500,000 in the current year to offset other income.

Business Income – Carried Interest House Senate

• Waiting period of 3 years to obtain long term capital gain treatment on the sale of certain partnership interest

• Not addressed

Partnerships – Technical Terminations House Senate

• Repeal of technical termination rules

• Not addressed

Polling Question

31

Corporate Tax

Tax Reform – Corporate Tax Rates House Senate

• Change graduated rates to a flat 20% tax rate for most corporations

• Changes graduated rates to a flat 20% tax rate for corporations

• Personal service corporations would be taxed at a 25% corporate rate

• Eliminates special tax rate for personal service corporations

Tax Reform – Dividend Received Deduction

House Senate

• Modifies 70% dividend received deduction to a 50% deduction

• Modifies 80% deduction for dividend received from a 20% owned corporation to 65%

• Modifies 70% dividend received deduction to a 50% deduction

• Modifies 80% deduction for dividend received from a 20% owned corporation to 65%

Tax Reform – Business Expensing House Senate

• Allows for 100% expensing of qualified property placed in service after September 27, 2017 and before January 1, 2023

• Repeal requirement that original use of qualified property begin with the taxpayer, allowing property to qualify if it is the taxpayer’s first use

• Similar expansion of 100% expensing as in house proposal

Tax Reform – Real Property Business Expensing

House Senate

• Not addressed

• Shortens recovery period for nonresidential real property and residential real property to 25 years

• Eliminates distinctions between qualified leasehold improvement property, qualifies restaurant property, and qualified retail improvement property and provides a general 10 year recovery period for qualified improvement property (with a 20-year ADS period)

Tax Reform – 179 Business Expensing House Senate

• Increases expense amount to $5,000,00

• Increases expense amount to $1,000,000

• Increases phase-out threshold to $20,000,000

• Increases phase-out threshold to $2,500,00

• Expands the definition of qualified real property eligible for section 179 to include certain qualified energy efficient heating and air conditioning property

• Expands the application of section 179 to depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging

• Expands the definition of qualified real property eligible for section 179 to include certain improvements to nonresidential real property: roofs, heating, ventilation, and air conditioning property; fire protection and alarm systems; security systems.

Tax Reform – Interest Expense House Senate

• Disallows deduction of net interest in excess of 30% of the business’s adjusted taxable income, regardless of business form, determined at tax-filer level

• Allows carry forward of disallowed interest for five years

• Businesses with average gross receipts of $25,000,000 or less would be exempt from the interest limitations

• Exclusion from interest limitation for businesses that use “floor plan financing indebtedness.” However, those who fully deduct related interest won’t be allowed 100% bonus depreciation

• Limits deduction for business interest to the sum of business interest income plus 30% of adjusted taxable income of the taxpayer for the taxable year (thus limits net interest expense to 30% of adjusted taxable income, as the House Bill does), determined at tax-filer level

• Provides for double-counting rules for pass-through and allows additional deduction for a partner of a partnership to the extent the partnership could have deducted more business interest

• Allows carry forward of disallowed interest deduction indefinitely

• Limitations do not apply to businesses who meet the $15,000,000 gross receipts test

Tax Reform – Accounting Method Changes

House Senate • Increases availability of cash method to corporations and

partnerships with corporate partners to $25,000,000 and repeal the requirement the business satisfy such requirement for all prior years

• Increases availability of cash method to those C-corporations and partnerships with corporate partners whose annual average gross receipts do not exceed $15,000,000 for the three prior taxable years

• Allows for the use of the cash method for business with average gross receipts of $25,000,000 or less, even if the business has inventories

• Increases exemption for inventory accounting to taxpayers that meet the $15,000,000 gross receipts test

• Exempts businesses with average gross receipts of $25,000,000 from UNICAP rules

• Exempts business with average gross receipts of $15,000,000 from UNICAP rules

• Increases the threshold for the exception to the percentage-of-completion method for long-term contracts to $25,000,000

• Expands the application of the exception from the percentage-of-completion method to those contracts that meet the 2 year threshold and are performed by a taxpayer that meets the $15,000,000 gross receipt test for the current year

Tax Reform – Accounting Method Changes

House Senate

• Not addressed

• Conformity of income recognition with applicable financial statement

• Codify current deferral regime for advanced payments for goods and services per Rev. Proc. 2004-34

Tax Reform – Business Deductions House Senate

• Repeal domestic production activities deduction (effective Jan 1, 2018)

• Repeal domestic production activities deduction (effective Jan 1, 2019)

• Repeal local lobbying expense deduction

• Not addressed

• Repeals deduction for entertainment, amusement, recreation activities, facilities, or membership dues; retains 50% deduction on food/beverages

• Repeals deduction for entertainment, amusement, recreation activities, facilities, or membership dues; retains 50% deduction on food/beverages

• Limitation on deduction for FDIC premiums

• Not addressed

• Repeal of rollover of publicly traded securities gain into SSBIC

• Not addressed

• Modifications to R&E expenditures

• Not addressed

Tax Reform – Business Credits House Senate

• Repeals credit for clinical testing expenses for certain drugs for rare diseases

• Limits credit for clinical testing expenses for certain drugs for rare diseases

• Repeal employer-provided childcare credit

• Not addressed

• Repeals rehabilitation credit

• Limits rehabilitation credit

• Repeal of work opportunity credit

• Not addressed

• Repeal of deduction for certain unused business credits

• Repeal of deduction for certain unused business credits (same as House proposal)

• Repeal new markets tax credit

• Not addressed

• Repeal of credit for expenditures to provide access to disabled individuals

• Not addressed

Tax Reform – Corporate Net Operating Losses

House Senate

• NOLs limited to 90% of taxpayer’s income • Repeal of carryback of NOLs (special one year

carryback for small business and farming losses) • NOL carry forward increased by an interest

factor • Applies to corporate and non-corporate NOLs,

as previously discussed

• Limits NOL deduction to 90% of taxable income determined without regard to the deduction

• Creates indefinite carry forward if disallowed losses

• Repeals carry-back in most cases, but retains 2 year carryback for certain farming losses

Tax Reform – Like-Kind Exchanges House Senate

• Limits application of like-kind exchange rule to transactions with respect to real property

• Similar to House rule by limiting like-kind exchange rule to real property not held primarily for sale

Polling Question

45

Tax Reform – Contribution to Capital House Senate

• Modifies current law such that contributions to capital would be included in gross income to the extent the amount of money and property received exceeds the fair market value of stock in exchange for such money or property

• Also applicable to noncorporate entities

• Not addressed

Tax Reform – Energy Credits House Senate

• Clarifies certain provisions of the credit for electricity produced from certain renewable resources

• Streamlines treatment of property under the energy investment tax credit

• Credit for residential energy efficient property would be extended for all qualified property placed in service prior to 2022, subject to a reduced rate for property placed in service during 2020 and 2021

• Repeal enhanced oil recovery credit • Repeal credit for producing oil and gas from marginal

wells • Modifications to credit for production from advanced

nuclear power facilities

• Not addressed

Tax Reform – Rules Relating to Intellectual Property

House Senate

• Streamline rules around self-created intellectual property such that gain or loss from the disposition of a self-created patent, invention, model or design, or secret formula would be ordinary in character

• Repeal of special rule allowing for the transfer of a patent prior to its commercial exploitation to qualify as long-term capital gain

• Not addressed

Conclusions

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