The Aerospace & Defense Forum Orange County Chapter November 1, 2018 Tax Reform Implications for the Aerospace & Defense Industry 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. 1 Presenters Matt Luzar, CPA, Tax Senior Manager Frederick Chang, CPA, Peter Henderson, CPA, Senior Manager International Tax Senior Manager Professional Experience Professional Experience Professional Experience Matt has practiced public accounting since 2010. His Fred has practiced public accounting since 2010. He is Peter has worked in public accounting since 2008. He areas of focus include providing partnership and a leader in Moss Adams' International Tax practice. specializes in federal and state R&D tax incentives. corporate tax services to a variety of clients, primarily in Fred provides tax consulting and compliance services to Peter has extensive experience in mechanical and high- the industries of manufacturing, aerospace, restaurants, both privately owned companies and publicly held tech industries, including: aerospace, automotive, food and beverage, and consumer products. In addition, corporations with both inbound and outbound manufacturing, machinery and equipment, heavy Matt provides tax consulting and compliance services to operations. Prior to Moss Adams, Fred was part of the construction and hardware, and software development. both privately owned companies and publicly held international tax services group at a Big 4 firm servicing Prior to joining Moss Adams, Peter spent a number of corporations. Matt also serves as a Manager with the clients in various industries in the Greater Washington years performing R&D tax credit studies at a Big Four National Office, providing consulting and tax support to DC and Philadelphia areas as well as the Southern firm. Peter has degrees in both engineering and local offices. Matt has been a leading member of our California region. He has advised on various cross- accounting. Peter is a leader in Moss Adams’ group at Moss Adams that has been studying tax reform border matters including mergers and acquisitions, IP Aerospace Industry Group and is a steering committee and its impact on certain industries. migrations, and foreign tax credit planning. member of the Aerospace & Defense Forum. 2 2 1
The Aerospace & Defense Forum Orange County Chapter November 1, 2018 Agenda • Background • Tax Highlights for Aerospace Industry • Business Tax Reform • International Tax Reform • Wrap Up 3 3 Background How we got here: House & Senate Conference President Introduced bills in Conferees released President Trump November Conference signed Tax Cuts Agreement Dec 15 and Jobs Act House passed its (TCJA) into law on bill Nov 9 Senate and House Dec 22 voted and passed Senate passed its on Dec 20 bill Dec 2 4 4 2
The Aerospace & Defense Forum Orange County Chapter November 1, 2018 Tax Reform Timeline 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 of harassment, abuse) December 22, 2017 President signs tax bill April 12, 2018 into law Notice 2018-35: Transitional guidance, accrual method August 8, 2018 taxpayers deferring advance payments from income Proposed regulations: Section 199A, 20% deduction for pass-through qualified business income 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 April 2, 2018 Notice 2018-28: Computing August 6, 2018 business interest expense Rev. Proc. 2018-40: Automatic limitation under section 163(j) consent, small businesses seeking accounting method change to April 16, 2018 reflect certain changes made by Notice 2018-38: Fiscal year U.S. the new tax law corporations to pay “blended” income tax rate under new tax law 5 5 Tax Highlights for Aerospace Industry Tailwinds of Tax Reform � 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 6 6 3
The Aerospace & Defense Forum Orange County Chapter November 1, 2018 Tax Highlights for Aerospace Industry Headwinds of Tax Reform � 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 7 7 Business Tax Reform: Provisions Provision Pre-Reform Law Reform Act 21% flat rate; effective Corporate Income 35% top rate 1/1/2018; blended rate for Tax Rate fiscal taxpayers Corporate AMT Applies Repealed 8 8 4
The Aerospace & Defense Forum Orange County Chapter November 1, 2018 Reduction in Corporate Tax Rate 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). 9 9 20% Deduction on Qualified Business Income Qualified Taxable Income Business Income •Limitation applies if 20% of Limitations •Must be a “trade or business” qualified trade or business •Certain services are excluded* income exceeds:** •Performing services as employee •(A) 50% of W-2 wages; or •Income that is “effectively •Deduction cannot exceed 20% of excluded connected” to a trade or business •(B) 25% of W-2 wages and 2.5% taxable income (less net capital in US gain) of “qualified property” •Certain investment items excluded (including capital gains) •Compensation excluded •Special loss recapture rule Qualified W-2 and Property Business Limitations **Service business may be treated as qualified business if taxpayer’s • Qualified cooperative dividends, qualified REIT dividends, and income is under certain threshold amounts qualified publicly traded partnership income also qualify for the section 199A deduction ** Limitation does not apply if taxpayer’s income is under certain threshold amounts. Importantly, the limitations apply on a • Proposed Regulations were issued in August 2018; included rules business-by-business basis . the aggregation of multiple T or B’s 10 10 5
The Aerospace & Defense Forum Orange County Chapter November 1, 2018 How Does the TCJA Change The Game? – Key Provisions 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 • 11 11 Items To Consider in Modeling Choice of Entity Decisions 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 • 12 12 6
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