Download to read offline
More Related Content
Similar to Tax Reform and the Impact to your Franchise by Honkamp Krueger4 2018
Tax Reform and the Impact to your Franchise by Honkamp Krueger4 2018
- 1. And the impactto your franchise Featured in Franchising USA magazine
- 2. AGENDA Individual highlights Business highlights Franchise entity selection TaxGap 2.0
- 3.
- 4. INDIVIDUAL HIGHLIGHTS Marginal TaxRates Married filing jointly and surviving spouses RATE OVER NOT OVER 10% -- $ 19,050 12% $ 19,050 $ 77,400 22% $ 77,400 $165,000 24% $165,000 $315,000 32% $315,000 $400,000 35% $400,000 $600,000 37% $600,000 -- 2017 RATE OVER NOT OVER 10% -- $ 18,650 15% $ 18,650 $ 75,900 25% $ 75,900 $153,100 28% $153,100 $233,350 33% $233,350 $416,700 35% $416,700 $470,700 39.6% $470,700 -- 2018
- 5. INDIVIDUAL HIGHLIGHTS Marginal TaxRates Married filing jointly and surviving spouses ($600,000 of taxable income in 2017) RATE OVER NOT OVER CUMULATIVE TAX 10% -- $ 19,050 $ 1,905 12% $ 19,050 $ 77,400 $ 8,907 22% $ 77,400 $165,000 $ 28,179 24% $165,000 $315,000 $ 64,179 32% $315,000 $400,000 $ 91,379 35% $400,000 $600,000 $161,379 37% $600,000 -- 2017 RATE OVER NOT OVER CUMULATIVE TAX 10% -- $ 18,650 $ 1,865 15% $ 18,650 $ 75,900 $ 10,453 25% $ 75,900 $153,100 $ 29,753 28% $153,100 $233,350 $ 52,223 33% $233,350 $416,700 $112,728 35% $416,700 $470,700 $131,628 39.6% $470,700 -- $182,831 2018
- 6. INDIVIDUAL HIGHLIGHTS Standard Deduction/Exemptions $24,000 for married individuals filing a joint return $18,000 for head-of-household filers $12,000 for all other taxpayers – Dependents subject to “Kiddie” Tax • $1,050 or • Sum of $350 and individual’s earned income up to $12,000 total $1,600 additional deduction for elderly and blind Personal/dependency exemptions reduced to $0
- 7. INDIVIDUAL HIGHLIGHTS Itemized Deductions– Taxes Aggregate deduction for state and local taxes (e.g. income tax, composite tax, property tax, vehicle tax) capped at $10,000. Cap does not affect taxes paid or accrued in carrying on a trade or business (Schedule C, E, F).
- 8. INDIVIDUALS Itemized Deductions – Medical Threshold on medical expense deduction is reduced to 7.5% of AGI for 2017 and 2018 10% of AGI AMT threshold is eliminated for 2017 and 2018
- 9. INDIVIDUAL HIGHLIGHTS Itemized Deductions– Charitable Contributions Maximum deduction is increased to 60% of AGI Excess contributions carryforward up to 5 years Deduction for any payment to universities in exchange for athletic tickets or seating licenses is eliminated
- 10. INDIVIDUAL HIGHLIGHTS Itemized Deductions– Mortgage Interest Deductible mortgage interest is limited to underlying indebtedness of up to $750,000. Grandfather clause: – The new lower limit does not apply to acquisition indebtedness incurred before Dec. 15, 2017. – Refinancing existing indebtedness does not disqualify the $1M limit as long as the new balance does not exceed the amount refinanced. Home equity loan interest is no longer deductible.
- 11. INDIVIDUAL HIGHLIGHTS Itemized Deductions– Miscellaneous All miscellaneous itemized deductions that were subject to the 2% floor are eliminated – Discussions needed with S-corporation owners and anyone with significant unreimbursed employee business expenses • Expenses may be able to be paid and deducted by the entity/employer. • May affect compensation and expense reimbursement arrangements Overall limitation on itemized deductions is eliminated
- 12. INDIVIDUAL HIGHLIGHTS Observation: Withthe reduction and elimination of many preference items, AMT will affect far fewer taxpayers. Exemption Exemption Phaseout 2017 2018 2017 2018 MFJ $ 86,200.00 $ 109,400.00 $ 164,100.00 $1,000,000.00 Single $ 55,400.00 $ 70,300.00 $ 123,100.00 $ 500,000.00 MFS $ 43,100.00 $ 54,700.00 $ 82,050.00 $ 500,000.00 Alternative Minimum Tax (AMT)
- 13.
- 14. BUSINESS HIGHLIGHTS All BusinessEntities Cash method of accounting is now permissible for C-corporations with revenues up to $25M (previously $5M) Accounting for inventories $10M threshold increased to $25M (indexed for inflation) UNICAP threshold of $10M increased to $25M (indexed for inflation) – No change and still required for all producers and manufacturers regardless of gross receipts Accounting for long-term contracts $10M threshold for percentage of completion method is increased to $25M (indexed for inflation)
- 15. BUSINESS HIGHLIGHTS Interestlimitation to 30% of adjusted taxable income – Only applies if gross receipts over $25M – Disallowed interest can be carried forward indefinitely – Does not apply to floor-plan – Adjusted taxable income is taxable income without regard to depreciation, interest income, interest expense, NOLs or DPAD NOL deduction – Limited to 80% of taxable income – No carryback but can carry forward indefinitely Like-kind exchanges – Real property only
- 16. BUSINESS HIGHLIGHTS C-Corporations Taxrate reduction for years beginning after Dec. 31, 2017 – Flat rate of 21% – No special rate for personal service corporations Elimination of AMT for years beginning after Dec. 31, 2017
- 17. BUSINESS ENTITIES Qualified BusinessIncome Deduction The rules then exclude a ‘specified service trade or business’ from QBI, but then allow such income to be eligible for the 20% deduction for QBI for taxpayers with taxable income below $315,000 for married filing joint returns. – For taxpayers with taxable income greater than $315,000, the 20% deduction is phased out between $315,000 and $415,000.
- 18. BUSINESS HIGHLIGHTS Bonus Depreciation Increased from 50% to 100% for assets placed in service after Sept. 27, 2017 Now includes new and used Cannot be purchased from a related party Phased out starting in 2023, sunsets after 2026 – 2023: 80% – 2024: 60% – 2025: 40% – 2026: 20% First tax year ending after Sept. 27, 2017, can elect 50% in lieu of 100%
- 19. BUSINESS HIGHLIGHTS Entertainmentexpenses – Generally are no longer deductible Meals – The general deduction allowed for 50% of business meals still applies – Employer providing food & beverages on employer premises and facilities • Prior to 2018: 100% deductible • 2018-2025: 50% deductible • After 2025: no longer deductible – Company picnics and holiday parties are still deductible
- 20.
- 21. BUSINESS ENTITIES C vs.S-Corporation Each business will have specific factors to consider in the choice of tax status of the business. The 21% federal C-corporation rate is an attractive rate. However, where corporate profit is subject to a 21% federal rate and state income tax, and then taxed again to the shareholders as a taxable dividend, the combined tax may approach 50%.
- 22. BUSINESS ENTITIES C vs.S-Corporation Where the income is eligible for the new 20% business deduction on Qualified Business Income (QBI), the combined federal and state tax rate may be in the range of 35%-40%. Where the income is not eligible for the new 20% business deduction on QBI, the combined federal and state tax rate may be in the range of 41%-46%.
- 23.
- 24. Our professionalsregularly see franchise owners who didn’t get their full refund and are often missing strategic tax planning advice that can save them several thousand dollars. Certain tax situations make this more likely in 2018 as a result of the Tax Cuts and Jobs Act. What is HK’s Complimentary TaxGap Review?
- 25. It isvery likely with all these changes that strategic advice, specific to franchise owners, has inadvertently been overlooked, and you may not have claimed credits and/or deductions that could make a difference on your refund. HK’s TaxGap Review can assist franchise owners to make sure nothing has been missed and they are minimizing their tax liability as much as possible. HK’s Complimentary TaxGap Review
- 26. Gather historicalfinancial and tax information. HK’s national franchise group reviews financial information. HK identifies and discusses planning opportunities. Summarize potential savings in a follow-up correspondence. Optimize your finances with HK’s Complimentary TaxGap Review
- 27. HK providesfranchise owners with access to a free, independent and objective holistic review of their current situation. Your results from the complimentary review will provide a diagnostic of recommendations, suggestions, cost savings identified, potential compliance issues, refund opportunities, etc. HK’s Complimentary TaxGap Review adds value
- 28.
Editor's Notes
- #3 Always consult with your CPA and attorney as there are many ways to structure each of the strategies; this presentation is an overview
- #7 Standard deduction/exemption $24,000 for married individuals filing a joint return $18,000 for head-of-household filers $12,000 for all other taxpayers Additional deduction for elderly and blind remains unchanged Personal / Dependency Exemptions are reduced to $0 2018 withholding rules may remain the same as 2017
- #8 Itemized deductions – taxes The aggregate deduction for SALT and Property Tax is capped at $10,000. This cap does not affect taxes paid or accrued in carrying on a trade or business
- #9 Itemized Deductions – Medical Threshold on medical expense deduction is reduced to 7.5% of AGI for 2017 and 2018 10% of AGI AMT threshold is eliminated for 2017 and 2018
- #10 Itemized Deductions – Charitable Contributions Maximum deduction is increased to 60% of AGI Excess contributions carryforward up to five years Donee-reporting requirements of contemporaneous written acknowledgement for any contribution over $250 is eliminated Must still prove the contribution’s amount/value and that no services/goods were provided but this prevents the denial of such contributions when the taxpayer can’t prove they had complete and proper documentation at the time the return was filed Deduction for any payment to Universities in exchange for athletic tickets or seating licenses is eliminated
- #11 Itemized Deductions – Mortgage Interest Deductible mortgage interest is limited to underlying indebtedness of up to $750,000. Home equity loan interest is no longer deductible. Grandfather clause: The new lower limit does not apply to acquisition indebtedness incurred before Dec. 15, 2017. Refinancing existing indebtedness does not disqualify the $1M limit as long as the new balance does not exceed the amount refinanced.
- #12 Itemized Deductions – Miscellaneous All miscellaneous itemized deductions that were subject to the 2% floor are eliminated. Discussions needed with: S-Corp owners Truck drivers Anyone with significant unreimbursed employee business expenses Overall limitation (Pease limitation/haircut) on itemized deductions is eliminated
- #13 AMT Exemption increases to: MFJ: $109,400 Single: $70,300 MFS: $54,700 Observation: With the reduction and elimination of many preference items, AMT will affect far fewer taxpayers
- #14 Always consult with your CPA and attorney as there are many ways to structure each of the strategies; this presentation is an overview
- #15 All Business Entities Accounting for inventories $10M threshold increased to $25M (indexed for inflation) UNICAP threshold of $10M increased to $25M (indexed for inflation) No change and still required for all producers and manufacturers regardless of gross receipts Accounting for long-term contracts $10M threshold for PCM is increased to $25M (indexed for inflation) Interest limitation to 30% of adjusted taxable income Only applies if gross receipts over $25M Disallowed interest can be carried forward indefinitely
- #16 All Business Entities Accounting for inventories $10M threshold increased to $25M (indexed for inflation) UNICAP threshold of $10M increased to $25M (indexed for inflation) No change and still required for all producers and manufacturers regardless of gross receipts Accounting for long-term contracts $10M threshold for PCM is increased to $25M (indexed for inflation) Interest limitation to 30% of adjusted taxable income Only applies if gross receipts over $25M Disallowed interest can be carried forward indefinitely
- #17 C-Corporations Tax rate reduction for years beginning after 12/31/17 Flat rate of 21% No special rate for personal service corporations Elimination of AMT for years beginning after 12/31/17 Cash method of accounting now increased from $5M to $25M (indexed for inflation)
- #18 Pass-Through Tax Deduction 20% deduction of the lessor of: Taxable income, or Qualified business income (QBI), but not to exceed 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of unadjusted basis of all qualified property Not eligible for certain service businesses Years between 2018-2025
- #19 Bonus Depreciation Increased from 50% to 100% effective September 27, 2017 Includes new AND used Phased out starting in 2023, sunsets after 2026 First tax year ending after 9/27/17, can elect 50% in lieu of 100%
- #20 DPAD is repealed NOL deduction Limited to 80% of taxable income No carryback Carry forward indefinitely Like-kind exchanges On real property only Entertainment expenses Self-created property
- #22 Affordable Care Act (ACA) Individual shared responsibility requirement, or individual mandate penalty, repealed for months after Dec. 31, 2018 (permanent change). Fewer subsidies will be paid for lower-income individuals if fewer people are accessing insurance. Not repealed: 3.8% NII tax, additional Medicare tax, medical device excise tax, health insurance provider fee, excise tax on high-dollar health plans. Retirement Special rule repealed allowing IRA contributions to one type of IRA (either traditional or Roth) to be recharacterized to the other type. Thus, recharacterization cannot be used to unwind a Roth conversion. Rules for hardship distributions were modified.