Md tax reform update 2 28-18

The Long-Lasting Impact of Tax Reform
Feb 28, 2018
Featuring: Matthew Bonney | Popi Barrett | Jennifer Sklar-Romano
THE LONG-LASTING
IMPACT OF TAX REFORM
MANUFACTURING & DISTRIBUTION
February 28, 2018
Speakers: Matthew Bonney, Popi Barrett, Jennifer Sklar-Romano

BUSINESS DEDUCTIONS
PASS-THROUGH ENTITIES
AND C CORPORATIONS
ENTITY CONSIDERATIONS
TODAY’S AGENDA
INTERNATIONAL
OVERVIEW OF
INDIVIDUAL CHANGES
Q&A

INDIVIDUALS
Presented by: Popi Barrett

TAX RATE CHANGES
Pre-Reform 2017 Tax Rate Tables Post Reform 2018 Tax Rate Tables
Rate Single Married Rate Single Married
10% $0-$9,525 $0-$19,050 10% $0-$9,525 $0-$19,050
15%
$9,526-
$38,700
$19,051-
$77,400
12%
$9,526-
$38,700
$19,051-
$77,400
25%
$38,701-
$93,700
$77,401-
$156,150
22%
$38,701-
$82,500
$77,401-
$165,000
28%
$93,701-
$194,450
$156,151-
$237,950
24%
$82,501-
$157,500
$165,001-
$315,000
33%
$195,451-
$424,950
$237,951-
$424,950
32%
$157,501-
$200,000
$315,001-
$400,000
35%
$424,951-
$4276,700
$424,951-
$480,050
35%
$200,001-
$500,000
$400,000-
$600,000
39.6% $426,701-up $480,050-up 37% $500,000 up $600,000-up

THINGS THAT ARE GONE
• Personal Exemptions
• State and Local Income and Property Tax Deduction - $10,000 combined limitation
• Miscellaneous Itemized Deductions
o Tax Preparation Fees
o Investment Advisory Fees
o Employee Business Expenses
o Moving Expenses
o Entertainment Expenses (not Meals)
• Personal Casualty Losses
• Moving Expenses
• Shared Responsibility Payment (2019)
• Alimony Taxability and Deduction (2019 Agreements)
• Gambling expenses in excess of net winnings

THINGS THAT HAVE CHANGED
• Interest Expense
o Mortgages
• Home Mortgages In Existence on December 15, 2017—no changes; $1M principal
• Post 12/15/17 home acquisition interest deduction limited to principal amounts of
$750,000. Second homes continue to qualify.
• Refinances post 12/15/17 grandfathered at $1 million ONLY up to debt level at date of
refinance. (No cashing out of equity).
o Home Equity Line of Credit
• Interest allowed on HELOC only to extent proceeds were used to acquire, construct or
substantially renovate property.
• EXAMPLE-$200,000 HELOC used in 2016 to buy $100,000 car and $100,000 to repair and replace
roof on home. In 2018 interest on roof repair only deductible.

THINGS THAT HAVE CHANGED
• Medical Expenses deductible to extent they exceed 7.5% of Adjusted Gross Income, down from
10%.
• Charitable Contributions to Public charities limit increased from 50% of AGI to 60% of AGI
• Standard Deduction almost doubled to $24,000 for married couple.
• Child Credit Increased to $2,000 per child and $500 per non child dependent
o Credit fully available until AGI reaches $400,000. ($200,000 single).
o Up to $1,400 refundable if tax liability is zero.
• Stock Option Income recognition from grants by private companies can be deferred for five years
• Business losses limited to $500,000 per year. Any excess carried forward as Net Operating Loss.
• Net Operating Losses cannot be carried back. Can be carried forward indefinitely
o Use of losses limited to 80% of taxable income
o Estate tax – lifetime exemption increased to $11M
o Gift tax – Annual gift exclusion is $15,000 starting in 2018

ALTERNATIVE MINIMUM TAX
• An alternative tax system that disallows many deductions and taxes income at a lower rate (For
2017: 28% vs 39.6%).
• Taxpayer pays the higher of the two computations.
• For 2017 and prior, the largest disallowed expenses for AMT are state and local income and real
estate taxes and miscellaneous itemized deductions.
• AMT exemption increased starting in 2018
• With state and local taxes and miscellaneous itemized deductions repealed, the largest cause of
AMT eliminated
• Anticipation is that many who were hit with AMT in the past will no longer be so.

IMPACT ON MA RESIDENT AT VARIOUS INCOME LEVELS
Gross Income Level Federal Tax increase (decrease) – 2017 v. 2018
400,000 (18,000)
500,000 (10,000)
750,000 (17,000)
1,000,000 (21,000)
2,000,000 (39,000)
3,000,000 (57,000)
Assumes MFJ, $20,000 Real Estate Taxes, 5% State Income Taxes, Two Children

BUSINESS DEDUCTIONS
Presented by: Popi Barrett

DEPRECIATION
• Temporary 100% Expensing for Certain Business Assets, reducing by 20% per year after 2022
o Applies to new and used property
o September 27, 2017 – December 31, 2022 ~ 100% expensing
o January 1, 2023 – December 31, 2023 ~ 80% expensing
o After December 31, 2026 ~ 0%
• Section 179
o Expensing limit increased from $500k to $1M after 2017, phase-out after $2.5M
o Expanded to include commercial property improvements such as roofs, fire protection, security and
HVAC
• Recovery life change
o Qualified improvements after December 31, 2017 is now generally depreciable over 15 years

BUSINESS INTEREST EXPENSE LIMITATION
• Business interest expense limited to 30% of adjusted taxable income
o 2018 – 2022 adjusted taxable income = EBITDA + interest income + floor plan
financing interest
o 2023 – 2025 adjusted taxable income = EBITDA + interest income + floor plan
financing interest
o Excess interest carries forward indefinitely
o Real property trades or businesses who make an election to depreciate real
property using ADS will not be subject to the interest expense limitation
o Limitation does not apply to businesses with average gross receipts of $25M
or less

MEALS AND ENTERTAINMENT EXPENSES
2017 Expenses
(Old Rules)
2018 Expenses
(New Rules)
Office Holiday Parties 100% deductible 100% deductible
Entertaining Clients
50% deductible
No deduction for
entertainment expenses
Event tickets, 50% deductible for face
value of ticket; anything above face value
is non-deductible
Tickets to qualified charitable events are
100% deductible
Business Meals (e.g. Employee
Travel Meals)
50% deductible 50% deductible
Meals Provided for Convenience
Of Employer
100% deductible provided they are
excludible from employees’ gross income
as de minimis fringe benefits; otherwise,
50% deductible
50% deductible
(nondeductible after
2025)

OTHER NOTABLE PROVISIONS
• Like-kind exchanges for property other than real estate eliminated
• R&D credit is still in place but after December 31, 2021 expenses
amortized over 5 years beginning at the mid-point of the tax year in which
the expenditures are paid or incurred
o There is no restriction to expenses paid and accrued prior to 2022
• Domestic Production Activities Deduction
o 9% deduction based on qualified production activity income has been
repealed

PASS-THROUGH ENTITIES
AND C CORPORATIONS
Presented by: Matthew Bonney

CHANGES TO CORPORATE TAXES
• Corporate tax rates reduced to 21%
• Dividends received deduction percentages reduced
• Corporate Alternative Minimum Tax repealed
• Modification of Net Operating Loss Deduction
• Repeal of Domestic Production Activities Deduction (Section 199)
• Five-year write-off of Research & Experimentation expenses
• Research & Experimentation credit
• Limitation of Excessive Employee Compensation
o Covered Employee
o Publically traded corporation
• Impact on Financial Reporting (ASC-740)

PASS-THROUGH ENTITIES: SECTION 199A
For tax years beginning after December 31, 2017, taxpayers other than C Corporations will generally
be entitled to a deduction of 20% of qualified business income.
Qualified Business Income Defined:
The term ‘qualified business income’ means, for any taxable year, the net amount of qualified
items of income, gain, deduction, and loss with respect to any qualified trade or business of the
taxpayer. Such term shall not include any qualified REIT dividends, qualified cooperative
dividends, or qualified publicly traded partnership income.
The term ‘qualified items of income, gain, deduction, and loss’ means items of income, gain,
deduction, and loss to the extent such items are effectively connected with the conduct of a trade
or business within the United States.
**Qualified Business Income does not include guaranteed payments or reasonable S Corporation
compensation.

199A DEDUCTION MECHANICS
In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any
taxable year an amount equal to the sum of—
‘‘(1) the lesser of—
‘‘(A) the combined qualified business income (defined below) amount of the taxpayer, or
‘‘(B) an amount equal to 20 percent of the excess (if any) of—
‘‘(i) the taxable income of the taxpayer for the taxable year, over
‘‘(ii) the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of
the qualified cooperative dividends, of the taxpayer for the taxable year, plus
‘‘(2) the lesser of—
‘‘(A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for
the taxable year, or
‘‘(B) taxable income (reduced by the net capital gain) of the taxpayer for the taxable year.

COMBINED QUALIFIED BUINESS INCOME
Combined qualified business income is computed as follows:
The SUM OF
1. The LESSOR OF:
(A) 20% of the taxpayers “qualified business income (defined below)” OR
(B)The GREATER OF: (alternative analysis involved when income is above various thresholds)
i. 50% of the W-2 wages with respect to the business, OR
ii. 25% of the W-2 wages of the business PLUS 2.5% of the unadjusted basis of all qualified property
2. PLUS the LESSOR OF:
(A) 20% of qualified cooperative dividends, OR
(B) Taxable income less net capital gain
The 20% deduction has limitations and phase outs and gets more complex when the taxable income is greater
than $315,000 but less than $415,000 when MFJ, and more than $157,500 but less than $207,500 for all other
taxpayers.

WHICH TAXPAYERS QUALIFY FOR THE DEDUCTION?
The following specified services will not qualify if income exceeds certain thresholds:
• Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or
• Any trade or business where the principal asset of such trade or business is the reputation or
skill of one or more of its employees or owners (this potentially can limit many other service
businesses).
The following business entities should qualify for the deduction:
• Real Estate (potential issues with net lease entities)
• Manufacturers/Distributors

TAX ACCOUNTING METHODS
• Increased gross receipts threshold to $25 million
o Cash method of accounting
o Accounting for inventories
o UNICAP – capitalization of indirect inventory costs
o Accounting for small construction contracts

ENTITY CONSIDERATIONS
Presented by: Matthew Bonney

C VS. S CORPORATION – 2018 TAX COMPARISON
S CORPORATION C CORPORATION
FEDERAL TAX RATE ON TAXABLE INCOME Taxed at Individual level; effective
rate after new Section 199A
deduction  29.6% active
owners, 33.4% passive owners
21%
STATE TAX DEDUCTION Limited to $10,000 Fully deductible against federal
taxable income
TAX ON DISTRIBUTIONS/ DIVIDENDS Not taxable to the extent of
shareholder basis
Qualified dividend tax rate 20% AND
NIIT 3.8% (all owners)
2018 MAX FEDERAL TAX RATE:
DISTRIBUTE EARNINGS AFTER FED TAX
ACTIVE - 29.6% ACTIVE – 39.8%
PASSIVE – 33.4% PASSIVE – 39.8%
2018 MAX FEDERAL TAX RATE:
DISTRIBUTE ½ EARNINGS AFTER FED TAX
ACTIVE - 29.6% ACTIVE – 30.4%
PASSIVE – 33.4% PASSIVE – 30.4%

CHOICE OF ENTITY – C CORPORATION
CONVERSION CONSIDERATIONS
• Consider cash flow needs – inside and outside business
• Distributions to be paid over time and effect of regular tax and Net Investment Income tax on dividends
• Business growth at lower tax rate
• State tax deductions
• Potential gain recognition for partnerships converting to C
• S to C conversion:
• Distribution prior S corporation earnings
• Unused suspended losses
• Consider intended exit strategy:
• Hold stock indefinitely v. sale or transfer
• Asset sale v. stock sale
• Financial statement consideration (deferred tax asset/liability with C Corporations)
• S Corporation revocation by the 15th day of the third month of tax year

INTERNATIONAL
Presented by: Jennifer Sklar-Romano

MODIFIED TERRITORIAL TAX REGIME
• Adoption of dividend participation exemption system
• U.S. corporate shareholders of specified foreign corporations (SFC) allowed a full deduction
against the foreign-source portion of dividends received
o 100% dividends received deduction (DRD)
o SFC = 10%-owned foreign corporation (not including a PFIC that is not a CFC)
o Applies only to C corporations
o Individual and pass-through shareholders continue to be subject to the existing world-wide tax regime
• U.S. shareholder must hold the stock of the SFC for more than 1 year
• Foreign tax credits disallowed for any dividend to which the DRD applies
• Subpart F and Section 956 investment in U.S. property rules continue to apply
• Exception for hybrid dividends
• Hybrid dividend = amount received from CFC for which CFC received a tax deduction or other benefit

MANDATORY REPATRIATION TAX
• One-time toll tax on undistributed nonpreviously taxed foreign earnings and profits (E&P)
• Pre-2018 accumulated deferred E&P MUST be included as Subpart F income
• Income inclusion for 2017 tax year
o Payment due with extension
• Toll tax applies to ALL U.S. shareholders of a SFC that is also a deferred foreign income corporation
(DFIC)
o In contrast to the DRD, which is available only to corporate U.S. shareholders, the toll tax applies to all
U.S. shareholders, including individuals, partnerships/LLCs, S corporations and trusts
o Deferral allowed for S corporations until a triggering event occurs
o U.S. shareholder = U.S. person owning 10% of the vote of a DFIC
o DFIC = any SFC of a U.S. shareholder that has accumulated post-1986 deferred foreign income greater
than zero

• E&P measurement date greater of E&P on Nov. 2, 2017 or Dec. 31, 2017
o Accruals after November 2 will not be taken into account in computation of E&P – e.g., foreign taxes
accrue at year-end, so they will reduce E&P only at December 31 measurement date
• Allocation of E&P deficits permitted
o Determined at Nov. 2, 2017
o E&P deficits of SFCs are allocated pro rata among the DFICs based upon the ratio of each DFIC’s positive
E&P over total positive E&P
 Allocation will impact which DFIC’s deemed paid foreign tax credits may be used to offset the toll
tax
• Payment is due over 8 years
o No interest
o 8% for first 5 years, then 15%, 20% and 25% for years 6 through 8, respectively

• Tax Rates
o Corporations - 15.5% on cash/cash equivalents and 8% on noncash assets
o Individuals- 17.54% on cash/cash equivalents and 9.05% on noncash assets
 3.8% Net Investment Income Tax (NIIT) applies for actual distributions
Not subject to 8 year pay-out
 May elect to be taxed at corporate rates on Subpart F income inclusion
o Foreign cash position includes aggregate cash positions of all SFCs, not just DFICs
• Fiscal year CFCs could possibly get a one-year break (Prop. Reg. §1.898-1(c)(1))
• Taxpayers can elect to preserve NOLs
• Disallowance for specific portion of foreign tax credit (FTC)
o Disallowed FTC rate of 55.7% to 77.1% based upon U.S. shareholder’s ratio of the aggregate foreign
cash position to the total Subpart F inclusion
• State tax ramifications?
o No current state guidance allowing 8 year pay-out

MODIFICATIONS TO SUBPART F INCOME
• Expansion of U.S. Shareholder definition to include value as well as vote
• Effective for tax years of foreign corporations beginning after Dec. 31, 2017
• Repeal of 30-day minimum holding period
• Effective for tax years of foreign corporations beginning after Dec. 31, 2017
• Downward attribution from foreign persons to related U.S. persons
• Effective for tax years of foreign corporations beginning before Jan. 1, 2018

GILTI & BEAT
• Global Intangible Low-Taxed Income (GILTI)
o Applies to U.S. shareholders of CFCs
o Treated similar to Subpart F income
o Refers to shareholder’s net CFC tested income over net deemed tangible income return
o 80% deemed paid foreign tax credit is available
o Separate foreign tax credit basket applies
o U.S. corporate shareholders allowed a deduction for 37.5% of its foreign-derived intangible income (FDII) and 50% of its
GILTI
• Base Erosion Anti-Abuse Tax (BEAT)
o Aimed at preventing companies from stripping out U.S. earnings via deductible payments to foreign affiliates
o Applies to C corporations with average annual gross receipts of at least $500,000,000 for the three preceding tax years
and a “base erosion percentage” of at least 3%
o BEAT is equivalent to the excess of 10% ( 5% for 2018) of “modified taxable income” (generally, regular taxable income
plus the base eroding payments such as interest and royalties) over its regular tax liability as reduced by credits

Md tax reform update 2 28-18

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