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The Long Lasting Impact of the Tax Reform
The document summarizes key changes to US tax law from the Tax Cuts and Jobs Act of 2017. It discusses reductions to individual and corporate tax rates. It also outlines changes to deductions and credits for individuals, as well as new tax rules for businesses, pass-through entities, and international income.
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The Long Lasting Impact of the Tax Reform
- 1. THE LONG LASTING IMPACTOF THE TAX REFORM L E T ’ S G E T R E A D Y
- 2. INDIVIDUALS PASS-THROUGH ENTITIES INTERNATIONAL TABLE OFCONTENTS BUSINESS AND CORPORATE
- 3. INDIVIDUALS Presented by: AnthonyCilibrasi, CPA, MST
- 4. Pre-Reform 2017 TaxRate 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 4 TAX RATE CHANGES
- 5. Income Level FederalTax (decrease) 400,000 (19,000) 500,000 (18,000) 750,000 (3,000) 1,000,000 (6,000) 2,000,000 (17,000) 3,000,000 (4,000) 5 Assumes $10,000 of dividends, $40,000 Real Estate tax. Two Children IMPACT ON NYS RESIDENT AT VARIOUS INCOME LEVELS
- 6. Impact on NYCResident at Various Income Levels Income Level Federal Tax (decrease)/increase 400,000 (19,000) 500,000 (18,000) 750,000 2,000 1,000,000 10,000 2,000,000 13,000 3,000,000 40,000 6 Assumes $10,000 of dividends, $40,000 Real Estate tax. Two Children IMPACT ON NYC RESIDENT AT VARIOUS INCOME LEVELS
- 7. • Personal Exemptions •State and Local Income and Property Tax-$10,000 exception • Miscellaneous Itemized Deductions • Tax Preparation Fees • Investment Advisory Fees • Employee Business Expenses • Moving Expenses • Personal Casualty Losses (except for Federally declared disaster areas) 7 THINGS THAT ARE GONE
- 8. • Shared ResponsibilityPayment (2019) • Alimony Taxability and Deduction (2019 Agreements) • Gambling expenses in excess of net winnings 8 THINGS THAT ARE GONE (Cont.)
- 9. • Interest Expense •Mortgages • Home Mortgages In Existence on December 15, 2017-no changes • 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) • Home Equity Line of Credit • Interest allowed on HELOC only to extent proceeds were used to acquire, construct or substantially renovate property EXAMPLE-$100,000 HELOC used in 2016 to buy $50,000 car and $50,000 to repair and replace roof on home. In 2018 interest on roof repair only deductible 9 THINGS THAT HAVE CHANGED
- 10. Things That HaveChanged • 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 • Timing of Deductions • Child Credit Increased to $2,000 per child and $500 per non child dependent • Credit fully available until AGI reaches $400,000. ($200,000 single) • Up to $1,400 refundable if tax liability is zero 10 THINGS THAT HAVE CHANGED (Cont.)
- 11. • Stock OptionIncome 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 • Use of losses limited to 80% of taxable income 11 THINGS THAT HAVE CHANGED (Cont.)
- 12. • An alternativetax 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 • Currently (2017 and prior) the largest disallowed expenses for AMT are state and local income and real estate taxes and miscellaneous itemized deductions 12 ALTERNATIVE MINIMUM TAX
- 13. • For 2018,28% vs 37% • AMT exemption increased (for 2018, exemption is $70,300 for single and HOH, $109,400 for MFJ) • 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 13 ALTERNATIVE MINIMUM TAX – 2018 VERSION
- 14. CHANGES TO BUSINESS TAXESUNDER TAX CUTS AND JOBS ACT Presented by: William Conron, CPA
- 15. CORPORATE TAXES • Corporatetax rate changed to a 21% flat tax o Corporations with over $100,000 of taxable income will be paying less tax in 2018 • Corporate AMT eliminated o AMT credit carryovers refundable starting in 2018 with limits o 50% of the excess of the AMT credit over what was used against the liability will be refundable each year 15
- 16. BUSINESS INTEREST EXPENSELIMITATION • Business interest expense limited to 30% of adjusted taxable income o 2018 – 2022 adjusted taxable income = interest income + EBITDA + floor plan financing interest o 2023 – 2025 adjusted taxable income = interest income + EBIT+ 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 16
- 17. DEPRECIATION • Temporary 100%Expensing for Certain Business Assets, reducing by 20% per year after 2022 o Applies to new and used property o Full expensing for property placed in service after September 27, 2017 until January 1, 2023 o January 1 2023 – December 31, 2023 80% expensing o January 1 2024 – December 31, 2024 60% expensing o January 1 2025 – December 31, 2025 40% expensing o January 1 2026 – December 31, 2026 20% expensing o Can elect out to 50% bonus – managing EBIT for Interest limitation • Section 179 expensing increased to $1M, phaseout threshold limit to $2.5M 17
- 18. ACCOUNTING METHOD CHANGES FORSMALL COMPANIES • What is a small company? o 3 year average gross receipts under $25M • Cash method of accounting o Average gross receipts of less than $25M (previously $5M) for the past 3 years are permitted to use the cash method of accounting regardless of entity structure of industry. Change in method of accounting under 481. • Accounting for inventories o Average gross receipts of less than $25M for the past 3 years are exempt from requirement to account for inventories under 471 regardless of entity structure of industry • UNICAP o Taxpayers with average Gross receipts of less than $25M (previously ($10M) are not required to capitalize direct and indirect costs related to real or tangible property acquired for resale 18
- 19. NET OPERATING LOSSES •Carried forward indefinitely and will be increased as if it earned interest to preserve its value over time • Limited to 80% of business’ net income • Carry back essentially eliminated 19
- 20. ENTERTAINMENT, MEAL AND TRANSPORTATIONEXPENSES • Deductions are eliminated for most entertainment expenses after 2017 • Deductions are eliminated for transportation and commuting benefits after 2017 • Deductions are eliminated after 2025 for employer –provided meals that are excludable from an employee’s income or are de minimus fringes 20
- 21. OTHER NOTABLE PROVISIONS •Like-kind exchanges for property other than real estate eliminated • R&D still around 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 • Loose Domestic Production Deduction o 9% deduction based on qualified production activity income 21
- 22. PASS-THROUGH ENTITIES Presented by:Ronald B. Hegt, CPA
- 23. • Qualified Tradeor Business owners (other than C Corporations) receive a deduction of 20% of Qualified Business Income subject to several restrictions. • Qualified Trade or Business includes all trades or businesses other than the following service businesses: 23 FLOW THROUGH BUSINESS TAX DEDUCTION
- 24. • Performance ofServices in the fields of • Health • Accounting • Law • Consulting • Performing Arts • Athletics • Finance and Brokerage Services • Any trade or business where principal asset is the reputation or skill of one or more owners or employees. • A sculptor runs his business through an S corp. Anyone looking for him to sculpt something would not hire his corporation if not for him. 24 FLOW THROUGH BUSINESS DEDUCTION - INELIGIBLE BUSINESSES
- 25. • Step 1- Deduction equal to 20% income allocated to owner. • Step 2 - Above deduction limited to HIGHER of • 50% of wages paid by business or • 25% of wages paid plus 2.5% of depreciable basis of assets used in trade or business. • Step 3 - If Business owner’s taxable income is under $315,000 the Step 2 limitation does not apply. This benefit phases out AT $415,000. • Step 4 - Amount determined above further limited to 20% of business owner’s taxable income. 25 FLOW THROUGH BUSINESS DEDUCTION - ELIGIBLE BUSINESS RULES
- 26. • Gross Income$2,000,000 • Salary Paid $500,000 • Taxable Income to Investors $1,500,000 • Step 1 - 20% of $1,500,000 = $300,000 • Step 2 - 50% of wages Paid = $250,000 • Step 3 - If business owner’s taxable income (1040) is $310,000 deduction is $300,000 (no step 2 limit). If business owner’s taxable income is $415,000 deduction is $250,000 • Step 4 - Step 3 computation limited to 20% of taxable income. If TI=$310,000 deduction limited to $62,000 26 FLOW THROUGH BUSINESS DEDUCTION - ELIGIBLE BUSINESS EXAMPLE
- 27. • Step 1- In general business owner (i.e., an MD owning an interest in an LLC engaged in the practice of medicine) not entitled to any flow through deduction. • Step 2 - If business owner’s taxable income is under $315,000 deduction equal to 20% of otherwise ineligible income. This benefit phases out by $415,000 • Step 3 - Step 2 deduction limited to 20% of business taxable income. 27 FLOW THROUGH BUSINESS DEDUCTION- INELIGIBLE BUSINESS RULES
- 28. • Use ofManaged Service Organization (MSO) to run non professional portion of practice. (Billing service, Accounts Receivable and Payable Management, H.R. functions, office maintenance and management) • Complete lack of Treasury Guidance • Business Purpose Test • Is an Ambulatory Surgery Center a: • Ineligible Service in field of Health? Or • Specialty landlord leasing operating room facilities for patient use? • Sales of Insurance and/or Real Estate • Commission Sales Agents; or • Brokers (a disqualified service) 28 FLOW THROUGH BUSINESS INCOME - DISCUSSION POINTS
- 29. INTERNATIONAL Presented by: JenniferSklar-Romano, JD, LL.M, MBA
- 30. MODIFIED TERRITORIAL TAXREGIME • 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 • 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 to certain CFC shareholders • Exception for hybrid dividends 30
- 31. • One-time tolltax 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 • Toll tax applies to ALL U.S. shareholders of a SFC that is also a deferred foreign income corporation (DFIC) • E&P measurement date greater of E&P on Nov. 2, 2017 or Dec. 31, 2017 • Allocation of E&P deficits permitted • Payment is due over 8 years 31 MANDATORY REPATRIATION TAX
- 32. • Tax Rates oCorporations - 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 • 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) • State tax ramifications? 32 MANDATORY REPATRIATION TAX
- 33. • Expansion ofU.S. Shareholder definition to include value as well as vote • Downward attribution from foreign persons to related U.S. persons • Repeal of 30-day minimum holding period 33 MODIFICATIONS TO SUBPART F REGIME
- 34. • Rev. Rul.91-32 position codified in response to taxpayer-friendly Tax Court decision in Grecian Mining case (currently under Appeal by the IRS) • Nonresidents selling an interest in a U.S. partnership will be taxable on the gain as deemed attributable to ECI • Hypothetical sale treatment mandated as if the U.S. partnership sold all of its assets o 10% WHT imposed on gross proceeds • FIRPTA rules continue to apply to gain from the sale of real estate held by a U.S. partnership • Effective for sales after Nov. 26, 2017, however, WHT requirement only applies to dispositions after Dec.31, 2017 34 SALE OF U.S. PARTNERSHIP INTEREST BY U.S. NON-RESIDENTS
- 35. • Imposes atax on foreign-source intangible income • Aimed at counteracting the incentive created by the participation exemption to shift profits offshore • Applies to U.S. shareholders of CFCs • Treated as Subpart F income 35 GLOBAL INTANGIBLE LOW-TAXED INCOME (GILTI)
- 36. • Aimed atpreventing companies from stripping out U.S. earnings via deductible payments (e.g., interest, royalties) to foreign affiliates • Targets companies that significantly reduce their U.S. tax liability with base eroding payments to foreign affiliates • Applies to C corporations and 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% • Both domestic corporations and foreign corporations generating effectively connected income (ECI) 36 BASE EROSION ANTI-ABUSE TAX (BEAT)
- 37. CITRINCOOPERMAN.COM WILLIAM T. CONRON,CPA PARTNER | CONNECTICUT (203) 847-4068 [email protected] ANTHONY CILIBRASI, CPA, MST DIRECTOR | WESTCHESTER (914) 949-2990 [email protected] RONALD B. HEGT, CPA PARTNER | WESTCHESTER (914) 949-2990 [email protected] JENNIFER SKLAR-ROMANO, JD, LL.M, MBA DIRECTOR | NEW YORK CITY (212) 697-1000 [email protected] HELPING YOU FOCUS ON WHAT COUNTS citrincooperman.com