TAX SEMINAR Jill Eggerichs Rock, CPA, JD Smith Schafer & - - PowerPoint PPT Presentation

TAX SEMINAR

Jill Eggerichs Rock, CPA, JD

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TOPICS FOR DISCUSSION

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• 1. C. Corp Specific Changes: AMT, Rates, NOL
• 2. All Entity Changes: Meals & Entertainment,

Depreciation (including Like Kind Exchanges), Business Interest, Credits, Accounting Methods

• 3. Flow-Through Issues: 199A, Partnership Audit

Rules

• 4. Sales Tax/Nexus Changes: Wayfair
• 5. Individual Tax Changes: AMT, Rates, Business

Losses, Itemized Deductions

• 6. Opportunity Zones
• 7. MN State Impact

C CORP SPECIFIC CHANGES

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C CORP

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• AMT = REPEALED
• Rate = 21%
• NOL = Limited to 80% of taxable income

– MN Law updated 5/30/19 to conform to 80% of federal limitation. MN law applies retroactively and applies to losses generated in years prior to the tax

• reform. Federal law only applies to losses generated

after 2017.

• With the new lower rate – should my business

consider converting from S corp to C Corp?

CHANGES FOR ALL BUSINESS ENTITIES

MEALS AND ENTERTAINMENT

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Type of Expenditure Pre-TCJA (2017) Post-TCJA (2018 and beyond) Client Meals 50% 50% Entertainment for Clients 50% Not Deductible Entertainment for employees or as part of employee party 100% 100% Meals offered to the public 100% 100% Meals for employer convenience 100% 50% Office coffee/soda/snacks 100% 50%

OTHER EMPLOYEE FRINGE BENEFITS

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• Parking

– Reasonable cost associated with employee parking – Exception for parking provided for the safety of employees – Exception for parking lots that have greater than 50% customer/public use

DEPRECIATION

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• Bonus Depreciation 100%

– Assets placed in service after Sept 27, 2017 – Assets with =< 20 year life – Computer software – Qualified improvement property – Both new and used MN Law updated 5/30/2019 – now conforms to federal asset types and requires an 80% add-back for assets placed in service after 9/27/17 – effective retroactively.

DEPRECIATION

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• Bonus Depreciation Continued

– Not allowed if deducting floor-plan interest.

• IRS Clarification on 9/13/19: may be allowed if requirements
• f 163(j) business interest limitation are met.

– No definition of “qualified leasehold property” after 1/1/18.

• Consensus in the industry is that this will not be updated any

time soon.

DEPRECIATION

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• Luxury Auto limits

No Bonus: Year 1: 10,100, Year 2: 16,100, Year 3: 9,700, Year 4+: 5,760 With Bonus: Year 1: 18,100 (years 2-4+ same as with no bonus)

• §179 Limits

– $1,020,000, Phaseout at $2,550,000 – Expanded definition of qualified real property to include HVAC, Roofs, and other items of real property – SUV of $25,500 (but qualified for 100% bonus depreciation – so bonus depreciation is better) – Clarification issued 9/13/19: if 179 is taken on a luxury auto no additional depreciation may be taken until the end

• f the useful life (5 years)

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• Only Real Property Qualifies
• Update to MN 5/30/19: now conforms to federal

treatment of this

LIKE KIND EXCHANGES

BUSINESS INTEREST EXPENSE

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• > $25M Gross Receipts or a “Tax Shelter”

– Gross Receipts test requires taxpayer to add together all related entities – What is a tax shelter?

• Syndicates count! This means if 35% of loss is flowing to

passive investors, you may be subject to this rule!

• Limited to:

– 30% of Adjusted Taxable Income + Business Interest Income + Floor Plan Financing Interest – Adjusted taxable income is EBITDA

• MN law update 5/30/19: conforms to this treatment

retroactively

TAX CREDITS

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• Rehab – 20% over 5 years

– MN Law Updated 5/30/19 – conforms to federal for applications made after 12/31/17

• Repeal of Tax Credit Bonds
• Paid FMLA credit

ACCOUNTING METHODS

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• Cash Method
• Accounting for Inventories
• Unicap
• Accounting for Long Term Contracts

PASSTHROUGH ENTITIES

INCREASED REPORTING REQUIREMENTS

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• S Corporation Shareholders

– Must report basis to the IRS if:

• Loss allocated from K-1
• Distribution from K-1
• Basis limitations exist
• Partnerships

– Must report capital accounts on a cash basis starting in 2019. – If capital accounts on a tax basis cause negative partner capital in 2018, must report those amount to the IRS by 3/15/2020 or 2018 return will be subject to non-filing penalty!

PARTNERSHIP AUDIT RULES

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• Change to how partnerships are audited; tax is paid at the

entity level on a partnership audit – rather than passing out amended K-1s

• Partnerships with > 100 partners or certain partners are

always subject to these rules

• Partnerships with < 100 partners and no “special” partners

can elect out of these rules

• If you do not elect out – amended returns are subject to

Administrative Adjustment Request

199A DEDUCTION

Basic Mechanics: 20% x Business Income

*subject to some limits

CATEGORIES OF TAXPAYERS

• Income < 321,400 (MFJ) or 160,700 (all others)

– 20% of QBI, only limited based on taxable income

• Income between 321,400 and 421,400 (MFJ) or

160,700-210,700 (all others)

– Phase out of 2% per 10,000 OR subject to limits below

• Income > 421,400 (MFJ) or 210,700 (all others)

– Non – Specified Service Business

• 20% of QBI, limited to 50% of wages or 25% of wages +

2.5% of assets

– Specified Service Business

• NO DEDUCTION

WHAT IS A SPECIFIED SERVICE BUSINESS?

199A-5: principal asset is the reputation or skill of the employees

• r owners

– Health – Law – Accounting – Actuarial – Performing Arts – Consulting – Athletics – Financial Services – Brokerage Services – Investment Management – Trading Services – Dealing in Securities – Also includes rent by related party to SSB

WHAT ABOUT RENTALS?

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• IRS Issued Safe Harbor Rules

– 250 or more hours of service on the property – Must have contemporaneous records

• Rentals to a related passthrough automatically

qualify (subject to the same limits as the related passthrough).

• IRS has excluded triple net leases, but other

considerations exist

• Other rentals may qualify under the IRS rules of

Section 162 trade or business.

PLANNING OPPORTUNITIES

• Maximize W-2 Wage/QBI
• Consider filing MFS
• Aggregate where applicable
• Consider rents

SALES TAX

SALES TAX – WAYFAIR DECISION

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• On June 21, 2018, the U.S. Supreme Court issued

(by a 5-4 vote) decision in South Dakota vs. Wayfair.

• Old standard: physical presence
• New standard: substantial nexus
• Physical presence is not required to meet the

“substantial nexus”, but when a taxpayer “avails itself of the substantial privilege of carrying on business in that jurisdiction”

– SD Law: sales volume and dollar amounts were high enough to illustrate this. – SD part of the streamlined sales tax.

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WAYFAIR, CONTINUED

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• While Wayfair principally addressed nexus in the

context of sales tax, it also effectively endorsed assertions by states that physical presence was not a prerequisite for the imposition of income tax and

• ther entity-level taxes.
• Many states have enacted economic nexus laws for

income/business taxes that create a filing responsibility based on revenue in the state.

INDIVIDUAL INCOME TAX

TAX RATES – 7 INDIVIDUAL BRACKETS

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Rate Single Married HOH MFS

10% $0 $0 $0 $0 12% $9,701 $19,400 $13,850 $9,701 22% $39,476 $78,951 $52,851 $39,476 24% $84,201 $168,401 $84,201 $84,201 32% $160,726 $321,451 $160,701 $160,726 35% $204,101 $408,201 $204,101 $204,101 37% $510,301 $612,351 $510,301 $306,176

TAX RATES – CAPITAL GAINS

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Rate Single Married HOH MFS 0% $0 $0 $0 $0 15% $39,375 $78,750 $52,750 $39,375 20% $434,550 $488,850 $461,700 $434,550

TAX RATES – ESTATES AND TRUSTS

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Rate Lower Threshold Upper Threshold 10% $0 $2,600 24% $2,600 $9,300 35% $9,300 $12,750 37% $12,750 And up

ESTATE, GIFT, AND GST TAXES

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2018 2019 Federal exemption $11.18M $11.4M MN exemption $2.4M $2.7M Minnesota extends to $3M for 2020 and later

KIDDIE TAX

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• Taxable income of a child (under age 19 or if the

child is a full-time student, under age 24) attributable to earned income taxed under the rate for single individuals

• Unearned income would be taxed under the trust

and estate rates

• For 2019, kiddie tax is triggered with unearned

income exceeding $2,200

ALTERNATIVE MINIMUM TAX (AMT)

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Individual AMT remains in place but with amounts increased:

• Exemption amounts: $71,700 for single filers / $111,700 for joint filers
• Phase-out thresholds: $1,020,600 (joint) and $510,300 (other filers)
• Increased exemption and phase-out threshold amounts apply 2018-2025

PERSONAL EXEMPTIONS AND CHILD TAX CREDIT

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• Personal Exemptions = Eliminated
• Child Tax Credit – increase to $2,000 ($500 for qualifying dependents other

than qualifying children).

• Qualifying child under the age of 17 increased phase out for MAGI MFJ

$400,000

ITEMIZED DEDUCTIONS

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Standard deduction vs. more limited itemized deductions

• Increased Standard Deductions

– 24,400 MFJ – 18,3500 HOH – 12,200 Single

• State and local itemized tax deductions limited to $10,000

(includes state and local property tax, plus either state and local income tax or sales tax)

• Charitable donation deductions remain in place, increasing

limits for cash contributions to public charities from 50% to 60% of AGI

ITEMIZED DEDUCTIONS

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• For homes purchased between 2018 and 2025, the

existing $1,000,000 limitation is reduced to $750,000

• No deduction for Home Equity Loans – except to

extent of use on the home

• Medical expense deductions for expenses in excess
• f 7.5% of AGI (In 2019 the floor rises to 10%)
• Miscellaneous itemized deductions are eliminated

OTHER DEDUCTIONS

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• Moving Expense Deduction

– Both the exclusion for qualified moving expense reimbursements and the deduction for moving expenses are suspended. – Exception for members of the Armed Forces.

• Casualty and Theft Losses

– No longer allowed except in federally-declared disaster areas.

ALIMONY

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• Divorce or separation agreement executed after

December 31, 2018, or one executed before December 31, 2018 but modified after it (as long as the modification expressly provides that the new amendments apply), alimony and separate maintenance are not deductible by the payor and are not included in the income of the payee. MN Update: MN now conforms as of 2019.

LOSS LIMITATION RULES

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• Excess Business Loss

– Aggregate gross income from trade/business less aggregate deductions from trade/business of the taxpayer, if less than zero.

• Limited to $500,000 (MFJ) or $250,000 (all others)

– Excess is carried forward as an NOL.

• NOL carryover limited to 80% of taxable income
• No NOL carryback

OPPORTUNITY ZONES

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• Economically-distressed community where new

investments may be eligible for preferential tax treatment

• Two Parts

– Temporary deferral of gain reinvested in opportunity zone within 180 days (a portion may be permanently excluded depending on holding period requirements: 10% if held for 5 years; and 15 % if held for 7 years) – Permanent exclusion of capital gains from the sale or exchange of the qualified opportunity fund if held for at least 10 years

• “Capital Gains” – includes recapture amounts

MINNESOTA

MINNESOTA

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• Changed starting point for MN income from federal

taxable to FAGI for tax years beginning after 12/31/18

• Conforms to increased standard deductions for individual

and married individuals.

– There is an income threshold for standard deduction reduction starting at 194,650 – Separate standard deduction for dependents – Additional deduction for taxpayers over 65 or blind – Continues charitable subtraction for nonitemizers for contributions over $500

MINNESOTA

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• Itemized deductions:

– Taxes limited to the same amounts as federal – Conforms charitable contributions to federal – Conforms interest expense – Allows medical > 10% AGI (fed is back to 10%) – Allows unreimbursed employee business expense > 2% and miscellaneous deductions > 2% (departure from fed) – Allows state deduction for casualty and theft (departure from fed)

MINNESOTA

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• 199A will not apply for MN
• Add-back 529 distributions for k-12 expenses to the

extent of earnings

• Change in tax rates for 2nd bracket from 7.05 to 6.80
• Establishes a state dependent exemption equal to

$4,250 in tax year 2019 (phase out under the same rules that were in place for federal exemptions). Indexed for inflation

MINNESOTA

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• 529 subtraction
• Student loan repayment
• Interest and penalty letters
• Desk audits related to conformity are coming!!

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