Presenters Matt Luzar, CPA, Tax Senior Manager Frederick Chang, - - PDF document

The Aerospace & Defense Forum Orange County Chapter November 1, 2018 1

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

Tax Reform Implications for the Aerospace & Defense Industry

Matt Luzar, CPA, Tax Senior Manager Peter Henderson, CPA, Senior Manager

Presenters

2 Frederick Chang, CPA, International Tax Senior Manager Professional Experience Peter has worked in public accounting since 2008. He specializes in federal and state R&D tax incentives. Peter has extensive experience in mechanical and high- tech industries, including: aerospace, automotive, manufacturing, machinery and equipment, heavy construction and hardware, and software development. Prior to joining Moss Adams, Peter spent a number of years performing R&D tax credit studies at a Big Four firm. Peter has degrees in both engineering and accounting. Peter is a leader in Moss Adams’ Aerospace Industry Group and is a steering committee member of the Aerospace & Defense Forum. Professional Experience Fred has practiced public accounting since 2010. He is a leader in Moss Adams' International Tax practice. Fred provides tax consulting and compliance services to both privately owned companies and publicly held corporations with both inbound and

• utbound
• perations. Prior to Moss Adams, Fred was part of the

international tax services group at a Big 4 firm servicing clients in various industries in the Greater Washington DC and Philadelphia areas as well as the Southern California region. He has advised on various cross- border matters including mergers and acquisitions, IP migrations, and foreign tax credit planning. Professional Experience Matt has practiced public accounting since 2010. His areas

• f

focus include providing partnership and corporate tax services to a variety of clients, primarily in the industries of manufacturing, aerospace, restaurants, food and beverage, and consumer products. In addition, Matt provides tax consulting and compliance services to both privately owned companies and publicly held

• corporations. Matt also serves as a Manager with the

National Office, providing consulting and tax support to local offices. Matt has been a leading member of our group at Moss Adams that has been studying tax reform and its impact on certain industries.

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The Aerospace & Defense Forum Orange County Chapter November 1, 2018 2

Agenda

• Background
• Tax Highlights for Aerospace Industry
• Business Tax Reform
• International Tax Reform
• Wrap Up

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Introduced bills in November House passed its bill Nov 9 Senate passed its bill Dec 2

House & Senate

Background

Conference President

How we got here:

Conferees released Conference Agreement Dec 15 Senate and House voted and passed

• n Dec 20

President Trump signed Tax Cuts and Jobs Act (TCJA) into law on Dec 22

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Tax Reform Timeline

5 12/15/2017 1/15/2018 2/15/2018 3/15/2018 4/15/2018 5/15/2018 6/15/2018 7/15/2018 8/15/2018 December 22, 2017 President signs tax bill into law April 2, 2018 Notice 2018-28: Computing business interest expense limitation under section 163(j) April 16, 2018 Notice 2018-38: Fiscal year U.S. corporations to pay “blended” income tax rate under new tax law August 6, 2018

• Rev. Proc. 2018-40: Automatic

consent, small businesses seeking accounting method change to reflect certain changes made by the new tax law April 12, 2018 Notice 2018-35: Transitional guidance, accrual method taxpayers deferring advance payments from income August 16, 2018 Senate Finance Committee Republicans identify issues for technical corrections, regulatory guidance for new tax law (qualified improvement property cost recovery, NOL deduction, and settlements

• f harassment, abuse)

August 8, 2018 Proposed regulations: Section 199A, 20% deduction for pass-through qualified business income

• Reduced tax rates
• Enhanced expensing rules for new/used equipment
• Enhanced usability of research credit
• Favorable taxation of foreign earnings
• Retained foreign export incentive (DISC)
• More flexible tax methods for $25 million or less in revenues
• Enhanced estate & gift planning exemption
• Retained LIFO for inventories

Tax Highlights for Aerospace Industry

Tailwinds of Tax Reform

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• New interest expense limitations
• New loss limitations rules
• New corporate net operating loss rules
• New Rules related to sale of Intangibles
• Repeal of Domestic Manufacturing Deduction
• Complex rules for companies with international operations
• No like kind exchanges – except Real Property

Tax Highlights for Aerospace Industry

Headwinds of Tax Reform

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Business Tax Reform: Provisions

Provision Pre-Reform Law Reform Act

Corporate Income Tax Rate 35% top rate 21% flat rate; effective 1/1/2018; blended rate for fiscal taxpayers Corporate AMT Applies Repealed

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Reduction in Corporate Tax Rate

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The maximum corporate tax rate has been lowered from 35 percent to 21 percent.

• This tax rate reduction, when considered alone, is clearly be beneficial to aerospace

companies, which face competition from overseas competitors.

• This is especially useful in conjunction with the repeal of the corporate AMT.
• However, the reduction in corporate tax rate should be considered in conjunction with

the elimination of other incentives.

• Special blended rate rules for Federal and AMT for fiscal year corps

Fact: Federal tax revenue generated by the aerospace industry was approximately $45 billion in 2016 (http://www.aia-aerospace.org).

• Must be a “trade or business”
• Certain services are excluded*
• Performing services as employee

excluded

Qualified Business

• Income that is “effectively

connected” to a trade or business in US

• Certain investment items

excluded (including capital gains)

• Compensation excluded
• Special loss recapture rule

Qualified Business Income

• Limitation applies if 20% of

qualified trade or business income exceeds:**

• (A) 50% of W-2 wages; or
• (B) 25% of W-2 wages and 2.5%
• f “qualified property”

W-2 and Property Limitations

• Deduction cannot exceed 20% of

taxable income (less net capital gain)

Taxable Income Limitations

20% Deduction on Qualified Business Income

10 **Service business may be treated as qualified business if taxpayer’s income is under certain threshold amounts ** Limitation does not apply if taxpayer’s income is under certain threshold amounts. Importantly, the limitations apply on a business-by-business basis.

• Qualified cooperative dividends, qualified REIT dividends, and

qualified publicly traded partnership income also qualify for the section 199A deduction

• Proposed Regulations were issued in August 2018; included rules

the aggregation of multiple T or B’s

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• 21% flat C corporation income tax rate effective in 2018
• Repeal of the corporate alternative minimum tax – i.e., a true 21% rate applies
• The 20% deduction for pass-through entities – section 199A
• SALT deduction limitation
• The excess business loss limitation – section 461(l)
• 100% expensing for qualified property (generally 20 year or less recovery period) for

2017 years starting on Sept 27, phased down in 20% increments for tax years beginning in 2023; increases in section 179 expensing.

• Changes to non-corporate brackets
• Changes in US international tax rules

How Does the TCJA Change The Game? – Key Provisions

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• Ability to receive 20% section 199A deduction
• How long can the shareholder-level tax from a C corporation be deferred?
• Need for cash distributions to shareholders
• Time horizon to expected sale
• Ability to eliminate the shareholder-level tax on C corporations
• How is your return being earned – income or capital appreciation?
• Tax brackets available to individuals.
• Self-employment taxes or other employment taxes
• Net investment income taxes
• Tax treatment of re-invested earnings – i.e., can and how quickly can you receive a tax benefit

from after-tax earnings

• State tax deductions
• Changes in international provisions

Items To Consider in Modeling Choice of Entity Decisions

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Alternative Minimum Tax – C-Corps

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AMT for C-Corporations has been completely repealed starting in 2018 tax year This will allow aerospace companies and owners to better utilize remaining tax incentives, such as the R&D tax credit. AMT credit carryforwards can now be treated as refundable credits for corporations not incurring regular income tax. Previously AMT credits could only be used to offset regular income tax and were not refundable. Refundable between 2018 and 2020 for up to 50% (100% in 2021) to the extent AMT carryovers exceed the regular tax liability.

Alternative Minimum Tax – Pass-Throughs

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AMT for individuals/pass-throughs is still in effect but has been “watered-down” Increased exemption amount – the amount of income automatically exempt from AMT has increase by roughly 30% Increased phase-out of exception amount – the phase-out of the income exemption has increased by approximately 600% This will allow aerospace companies and owners to better utilize remaining tax incentives, such as the R&D tax credit.

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Accounting Methods

Provision Pre-Reform Law Reform Act

Simplified Methods for Smaller Taxpayers Access to cash method and exemptions from inventory, UNICAP, and POC methods limited Taxpayers with gross receipts of less than $25M can use cash method, and are exempt from required inventory/UNICAP methods and POC for LTCs Accrual Income Inclusion Recognize when “fixed and determinable” – generally, earliest

• f when due, paid or earned

Accrual taxpayers with AFS must recognize income no later than when recognized in AFS; AFS is Form 10-K, audited F/S, F/S provided to fed/state govt or agency (not a tax return)

• Despite speculation, tax reform did not repeal LIFO
• Trump’s recent tariffs on imported aluminum and steel

have contributed to increased cost of metals, including those purchased from domestic suppliers

• Adapting LIFO could allow certain companies to

increase their cost of goods sold deductions

• Specifically applicable to machine shops and other

component part manufacturers that rely heavily on raw metals inputs

Tariffs and the use of LIFO

15 of the 20 reviewed LIFO IPIC categories for A&D have increased year to date.

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Increased Cost Recovery Incentives

Provision Pre-Reform Law Reform Act

Bonus Depreciation

50% bonus depreciation for qualified property acquired prior to 9/28/27;

• nly for new property

100% full expensing for qualified property acquired and PIS after 9/27/17 and before 1/1/23; new or used property; phase down starts in 2023

Improvement Property

Four classifications – recovered over 15 years (QLHI, QRIP, QRP) or 39 years (QIP) – most eligible for bonus Only QIP remains – drafting error results in 39 year recovery and no bonus

Section 179 Deduction

Expensing limits of $500K / phase-

• ut starts at $2M

Expensing limits of $1M / phase-out starts at $2.5M; QIP now eligible

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Increased Cost Recovery Incentives

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• This will have a positive impact on the Aerospace industry especially considering the

high volume of fixed assets purchased by aerospace manufacturers. Companies are now able to deduct 100% of the cost of new machinery and equipment such as CNC machines and robotics.

• Changing landscape on M&A deals – asset purchases.
• Cost Segregation Studies - Deductions can further be accelerated by performing cost

segregation studies. Cost segregation studies decouple the individual building and leasehold improvement components initially categorized as real property (and subject to 39 year depreciable life) into components with shorter depreciable lives. 17 18

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Interest limited is carried forward indefinitely Adjusted taxable income: Cannot be below zero Computed without regard to: – Non-business income or expenses – Business interest expense or income – NOL deduction – Pass-through deduction – For years before 2022, deductions for depreciation, amortization, and depletion Businesses with average gross receipts of $25M or less would be exempt Real property trade or business may elect out, but must use ADS recovery periods for real property

Business Interest Deduction

Limited to sum of: 1) 30% of “adjusted taxable income” 2) Business interest income 3) Floor plan financing interest

• Old law

Two-year carryback and 20-year carryforward Deduction may fully offset taxable income (90% limitation for AMT purposes)

• New law

Two-year carryback period repealed Deduction limited to 80% of taxable income for NOLs arising in years beginning after 12/31/2017 and available for carryforward indefinitely

• Fact

JTC estimated the new tax law would increase revenue by approx. $201.1 billion

• ver 10 years.

Net Operating Losses

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Allows for deferral of capital gains

• 5 Year Investment – Reduction of Capital gain on original investment of 10%
• 7 Year Investment – Reduction of Capital gain on original investment of 15%
• 10+ Year Investment – Exempt from gain on the appreciation of the investment in an Opportunity Fund

Reinvestment of capital gains into Federally designated distressed areas Capital gains recognized by taxpayer must be reinvested into an Opportunity Fund within 180 days after the exchange date Gain deferred until the earlier of the date the investment is sold or exchanged, or December 31, 2026. The interest in the Opportunity Fund must be acquired in exchange for cash

Qualified Opportunity Zones

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• Corporation or partnership created solely for the investment

in QOZ property

• At least 90% of an opportunity fund’s assets must be qualified
• pportunity zone property

Opportunity Zone Property

• Includes QOZ business property, stock or partnership interest of an opportunity

zone business

Opportunity Zone Business Property

• Tangible property (equipment, buildings, etc.) used in the trade or business of a

an Opportunity Fund

• Purchased from an unrelated party
• Original use of property commences with OF; or property is “substantially

improved”

Opportunity Funds

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Elimination of the “Special Interest” Tax Provisions

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REPEALED: Domestic Production Activities Deduction (aka DPAD) of Section 199 REPEALED: Deductibility of entertainment expenses REPEALED: Various other business credits SUSTAINED: R&D Tax Credit

AICPA Construction and Real Estate Conference 24

Considered to be the most lucrative tax incentives for aerospace companies Aerospace engineering, tooling, manufacturing, MRO, DER, PMA activities may qualify Cash benefits can be up to 15% of qualified expenses which may include labor, materials, and subcontractors R&D tax credits now more valuable with reduced tax rates and the repeal of corporate AMT Beginning in 2022, specified U.S. research expenses must be capitalized and amortized ratably over five years.

Research & Development

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Transition charge - tax on unrepatriated earnings ranges from 8% to 15.5% Transition tax creates Previously Taxed Income (“PTI”) which can be brought back tax-free C Corporations would receive a 100% dividends received deduction from 10%+ owned foreign subsidiaries No foreign tax credits allowed for a portion of PTI and on excluded dividends

International Tax Reform

U.S. international tax system begins to move to a “territorial system.”

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• U.S. shareholders recognize foreign

subsidiaries’ “global intangible low- taxed income” (GILTI).

• GILTI measured as income in

excess of 10% of CFC’s Qualified Active Business Investments, reduced by interest expense

• All foreign subsidiary income

aggregated

• C Corporations get two benefits:
• Deduction of amount (up to 50% -

reduced in future years)

• Foreign tax credit for taxes paid in

foreign countries

• Only 80% of the tax on the net

inclusion

• No carryover or carry back of any

excess credits

• Credits cannot be used to offset
• ther foreign source income
• Individuals (i.e., direct owners or

indirect through a flow-through) may get the benefit of foreign tax credits, but separate analysis needs to be done

• Remainder of Subpart F, including

Section 956, generally maintained

International Tax Reform

However, the move to a full territorial system is not complete. Minimum tax on Foreign High Returns/”GILTI”.

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International Tax Reform

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Base Erosion and Anti-Abuse Tax (“BEAT”) Foreign Derived Intangible Income (“FDII”) 267A & Hybrid Arrangements

Additional Provisions

Wrap Up

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Review Tailwinds and Headwinds to understand how tax reform impacts your organization. Determine and implement your revised strategic plan. Take advantage of the transition.

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200+ Aerospace Clients

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locations west of the Mississippi Moss Adams Location Satellite ARIZONA Phoenix CALIFORNIA Fresno Los Angeles Manhattan Beach Napa Orange County Silicon Valley Sacramento San Diego San Francisco Santa Rosa Stockton Walnut Creek Woodland Hills KANSAS Kansas City NEW MEXICO Albuquerque OREGON Eugene Medford Portland TEXAS Dallas WASHINGTON Bellingham Everett Issaquah Seattle Spokane Tacoma Tri-Cities Wenatchee Yakima

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but nor limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking

• ffered through Moss Adams Capital LLC.

Community Banking Conference

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