A g e n d a Business Provisions Individual Provisions Other - - PDF document

The Aerospace & Defense Forum San Fernando Valley Chapter February 20, 2018 1

T a x R e f o r m : W h a t A & D C o m p a n i e s N e e d t o K n o w

J o s h u a Y e a r g i n , C P A P a r t n e r J o s h u a . Y e a r g i n @ C o h n R e z n i c k . c o m ( 3 1 0 ) 6 2 2 - 4 3 3 1

A g e n d a

• Business Provisions
• Individual Provisions
• Other Provisions

1

February 22, 2018

The Aerospace & Defense Forum San Fernando Valley Chapter February 20, 2018 2

B u s i n e s s P r o v i s i o n s

Tax Cuts and Jobs Act Prior Law

Corporate Rate Flat 21% rate Maximum 35% rate Corporate AMT Eliminated 20% rate Pass-Through Entities owned by Individuals Income is passed through but up to 20% deduction for “qualified business income” Income is passed through to the owners and taxed at the individual level Section 179 Limitation Limitation of $1 million and phase out at $2.5 million Limitation of $500,000 and phase out at $2 million Cost Recovery 100% expensing for new and used property placed in service Sept. 27, 2017 and Jan. 1, 2023. Five-year phase down starts in 2023 50% bonus depreciation of qualified property placed in service before Jan. 1, 2020 Excess Business Loss Limitation Aggerate business losses in excess of $500k (married filing joint) are disallowed from offsetting other income. Excess losses are carried forward. No limitation on use of losses 2

February 22, 2018

B u s i n e s s P r o v i s i o n s ( c o n t ’ d )

Tax Cuts and Jobs Act Prior Law

Business Interest Expense Limited to the sum of business interest plus 30% of adjusted taxable income Deductible with no limitation Net Operating Losses

• Carryback is repealed
• Indefinite carryforward
• Limited to 80% of income for losses

beginning after Dec. 31, 2017 Carried back 2 years and carried forward 20 years Domestic Production Repeal Section 199 for DPAD Deduction up to 9% of qualified income R&D / R&E Starting in 2022, “Specified R&E expenses” must be capitalized and amortized over 5 years (15 years outside the US) for amounts paid or incurred after Dec. 31, 2021 Either currently deduct R&E expenses or capitalize and amortize over the useful life of the research Cash Method of Accounting Cash method of accounting allowed for C corporations and companies with inventory with up to $25 million in gross receipts Cash method of accounting disallowed for C Corporations and companies with inventory (except for small businesses) 3

February 22, 2018

The Aerospace & Defense Forum San Fernando Valley Chapter February 20, 2018 3

D e d u c t i o n f o r P a s s - T h r o u g h B u s i n e s s e s

• 20% Deduction - Non-corporate owners of pass-through businesses are

allowed a 20% deduction of qualified business income (QBI) with respect to a qualified trade or business in the United States

• Excluded Income - Investment income (such as interest, dividends, and

capital gains) and Specified Service Trades or Businesses (SSTB) are excluded from QBI and generally not eligible for the 20% deduction

• Limitation - The 20% deduction is limited to the greater of 50% of

business’s W-2 wages or 25% of business’s W-2 wages plus 2.5% of qualified property. Also limited to overall QBI and taxable income.

• Threshold - The SSTB limitation and W-2 wages limitation do not apply to

individuals whose taxable income does not exceed $315,000 (MFJ).

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February 22, 2018

B u s i n e s s I n t e r e s t E x p e n s e L i m i t a t i o n

• Limitation (2018 – 2021) - Net business interest expense deduction is

limited to 30% of Adjusted Taxable Income (Taxable income with add backs for interest, taxes, depreciation and amortization (EBITDA)).

• Limitation (2022 – Forward) - Net business interest expense deduction is

limited to 30% of Adjusted Taxable Income that does not take into account depreciation and amortization addback when calculating 30% limitation (EBIT).

• Carryforward – Disallowed interest expense is carried forward indefinitely
• Exception - Interest expense limitations do not apply to taxpayers under

$25 million gross receipts.

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February 22, 2018

The Aerospace & Defense Forum San Fernando Valley Chapter February 20, 2018 4

N e t O p e r a t i n g L o s s / E x c e s s B u s i n e s s L o s s

• NOL carryback – NOL carryback is repealed and NOL can be carried

forward indefinitely

• Limitation - NOL usage will be limited to 80% of taxable income
• Net Excess business losses – Business losses of a non-corporate

taxpayer are not allowed for the taxable year in excess of $500K (MFJ).

• Such losses are carried forward and treated as part of a taxpayer’s NOL

carryforward in subsequent taxable years

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February 22, 2018

C a s h M e t h o d o f A c c o u n t i n g O p p o r t u n i t i e s

• Cash Method - Taxpayers with less than $25 million in gross receipts will be

able to use the cash method of accounting.

• Regardless of type of entity (C Corp, S Corp, LLC, etc) or whether inventory is a

material income producing factor.

• UNICAP – Taxpayers under $25 million gross receipts are also exempt from

the UNICAP rules of IRC Section 263A.

• Inventories - Taxpayers under $25 million gross receipts are exempt from

accounting for inventories under IRC section 471. Instead, inventory can be treated as non-incidental supplies, including related overhead and labor.

• A Change in Accounting Method – A Form 3115 would be required to

change to Cash method of Accounting.

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February 22, 2018

The Aerospace & Defense Forum San Fernando Valley Chapter February 20, 2018 5

I n d i v i d u a l P r o v i s i o n s

Tax Cuts and Jobs Act Prior Law

Individual Rates Seven rate brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) Seven rate brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) LTCG / QDI Rates Maximum 20% rate (unchanged) Maximum 20% rate Standard Deduction $12,000 – Single $24,000 – Married Filing Jointly $6,500 – Single $13,000 – Married Filing Jointly Personal Exemption Eliminated $4,050 per person Itemized Deduction No overall limitation Phase out begins at $320,000 for joint filers and $266,700 for single filers State/Local Tax Deduction State and local sales, income, and property tax deduction capped at $10,000 No cap for state/local tax deductions Net Investment Income Tax 3.8% of net investment income if MAGI is above $250,000 (MFJ) (unchanged) 3.8% of net investment income if MAGI is above $250,000 (MFJ) ACA Individual Mandate Eliminate mandate payment beginning after Dec. 31, 2018 Greater of 2.5% of a household’s AGI

• r a maximum flat penalty of $2,085

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February 22, 2018

O t h e r P r o v i s i o n s

• Estate and gift tax - The exemption doubles from $5 million to $10 million

for transfers between 2018 -2025.

• Entertainment expenses – No deduction is allowed for entertainment

expenses, including membership dues for clubs.

• Meal Expenses – Business meals are generally still 50% limited. Meals

provided as a de minimis fringe (formerly 100% deductible) are 50% deductible until 2025, then non-deductible thereafter.

• Transportation Fringe Benefits – No deduction is allowed for expenses

associated with transportation fringe benefits for employees.

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February 22, 2018

The Aerospace & Defense Forum San Fernando Valley Chapter February 20, 2018 6

Q u e s t i o n s

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February 22, 2018