Tax Strategies for a New Environment NCPA 2018 Annual Convention - - PDF document

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Ollin Sykes, CPA.CITP, CMA Scotty Sykes, CPA Sykes & Co. NCPA 2018 Annual Convention

Tax Strategies for a New Environment

Scotty Sykes, CPA,CGMA Ollin B. Sykes, CPA.CITP, CMA

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Ollin Sykes, CPA.CITP, CMA Scotty Sykes, CPA Sykes & Co. NCPA 2018 Annual Convention

Tax Strategies for a New Tax Environment

Disclosure

• Ollin Sykes is the President of Sykes & Co. The conflict of interest

was resolved by peer review of the slide content.

• Scotty Sykes is an employee of Sykes & Co. The conflict of interest

was resolved by peer review of the slide content.

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Learning Objectives

• 1. Illustrate changes to the tax code that will affect community

pharmacies in 2018 and beyond.

• 2. Summarize the impact of bonus depreciation expansion on your

business’s growth.

• 3. Discuss the pass-through deduction for qualified pharmacy

income.

Agenda

• Tax Cuts & Jobs Act of 2017
• Individual Highlights
• Business Highlights
• Cash Method Accounting
• Section 199A QBI Deduction
• Proactive Tax Planning
• Comprehensive Example

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Tax Cuts & Jobs Act of 2017

Tax Cuts & Jobs Act of 2017 (TCJA)

• First major tax reform in over 30 years
• Will impact pharmacy owners
• Most changes start 2018
• Most provisions expire after 2025
• Rev. Proc. 2018-40
• Proposed Regulation 1.199A

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Individual Highlights

Individual Highlights

• Seven tax brackets
• No more dependent exemption
• Increase in standard deduction
• Higher child tax credit ($2,000)
• AMT tax not repealed but exemptions &

phaseouts increased

• Net Operating Loss changes (NOL)

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Itemized Deductions

• Repeal of overall limitation on itemized

deductions

• Medical deduction 7.5% of AGI for 2018, 10%

starting 2019

• Mortgage/Home equity interest limitations

Itemized Deductions

• State, Local, Real Estate tax deduction limited

to $10,000

• 2% Misc. Deductions (home office,

investment fees, etc.) no longer deductible

• Charity limitations increased to 60% of AGI

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Business Highlights

Corporate Tax Rate

• Change in C Corporation tax rate to 21%

effective after 12-31-17

• Planning for S to C tax structure will require

extensive planning

• Corporate AMT tax repealed
• Net Operating Loss changes (NOL)

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Domestic Production Activities Deduction (DPAD)

• Applicable to compounders
• Repealed in 2018
• Analysis needed if DPAD not taken in previous

years Research & Development Credit (R&D Tax Credit)

• Potentially applicable to compounders
• Credit not impacted by TCJA
• Four step process to ensure eligibility
• Analysis needed if not taken in previous years

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Meals & Entertainment

• Documentation required
• Entertainment expenses - REPEALED
• Holiday Office Parties/Summer Picnics (All

staff invited) – 100% deductible Meals & Entertainment

• Meals for employees on the road for work

and the convenience of the employer are 50% deductible

• Meals with vendors/suppliers or to build

relationships, either 50% deductible or nondeductible (Guidance needed)

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Section 263A: UNICAP

• Tax increase for larger pharmacies
• Revenues > $10 million pre 2018
• Revenues > $25 million TCJA
• Very complex
• Many pharmacies noncompliant

Depreciation

• Bonus depreciation allows 100% write-off in

2018, limitations apply

• Section 179 allows 100% write-off in 2018,

limitations apply

• Applies to new and used assets
• Must be placed in service
• Multi-year planning suggested

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Delivery Vehicles

• Increase in first year deprecation of $10,000 from

$3,160

• 1031 exchange of vehicles has been REPEALED
• Planning opportunities for vehicles over 6,000 lbs.
• Documentation required

Cash Method of Accounting

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Cash Accounting Method

• Major fundamental change
• Taxpayer friendly
• Will impact financial reporting
• IRS Revenue Procedure 2018-40

Cash Accounting – Prior TCJA

• Generally, pharmacies required to report

accrual basis accounting for tax purposes

• Many pharmacies incorrectly reported cash

basis for tax

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Cash Accounting - TCJA

• Expanded the use of the cash method of

accounting for tax reporting

• Available for pharmacies < $25 million in gross

receipts the prior three years Cash Accounting - Inventory

• Must continue to use an accounting method

for inventories that either:

• Treats as non-incidental materials &

supplies; or

• Conforms to taxpayer’s financial accounting

treatment

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Cash Accounting – Form 3115

• Form 3115 Change in Accounting Method
• 481(a) adjustment is taken in year of change if

negative (expense)

• If positive (income), 481(a) adjustment can be taken in

year 1 if under $50,000 or over a four year period if greater than $50,000

Cash Accounting – Overview

• Controlled groups must be considered for gross

receipts test

• Cash basis tax and books issues
• Existing cash basis pharmacy taxpayers = no

benefit 2018

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Section 199A QBI Deduction

Section 199A: QBI Deduction

• Qualified trade or businesses are entitled to a

deduction equal to 20% of taxpayer’s qualified business income (QBI)

• Can be extremely complex
• IRS Proposed Regulation 1.199A

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Eligible Entities

• Sole proprietors – Schedule C
• LLCs
• Partnerships
• S Corporations
• Rental Property limitations
• Not C Corporations

Qualified Business Income (QBI)

• Qualified business income (QBI) is essentially

the net trade or business income from the pharmacy

• Does not include reasonable

compensation/guaranteed payments paid to the taxpayer from the pharmacy

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Qualified Trade or Business Defined

• Every business except:
• Trade or business of performing services

as an employee (W2)

• Specified service trade or business (SSTB)

Specified Service Trade or Business

• Any trade or business involving the performance
• f services in the fields of health, law, accounting,

actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management

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Specified Service Trade or Business

• Any trade or business where the principal asset of

such trade or business is the reputation or skill of

• ne or more of its employees.

Health Defined

• Performance of services in the field of health means the

provision of medical services by physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals who provide medical services directly to a patient.

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Health Defined Continued

• The performance of services in the field of health

does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient.

Health Defined Continued

• For example, the performance of services in the field of

health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or research, testing, and manufacture and/or sales of pharmaceuticals or medical devices.

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How Does it Work?

• General Rule/SSTB Exception
• Phased-In Deduction
• Limited Deduction
• Determined separately for each qualified

trade or business General Rule/SSTB Exception

• Full 20% deduction eligible if taxable income

is less than -

• $315,000 or less for married filing joint
• $157,500 or less for single
• Even SSTB are entitled to the General Rule under

the thresholds

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General Rule

• No W-2 limitations
• Pharmacy owners want the “General Rule”
• Decrease taxable income with proactive tax

planning Phase-in Deduction

• Deduction phased-in if taxpayer’s taxable

income is -

• between $315,000 and $415,000 for MFJ
• between $157,500 and $207,500 for

Single

• SSTB still eligible in this range

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Limited Deduction

• Deduction limited if taxpayer’s taxable income

is -

• over $415,000 for married filing joint
• over $207,500 for single
• SSTB is not eligible

Limited Deduction

• Deduction is first limited to the greater of:
• 50% of taxpayers allocable share of W2

wages paid by the business

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Limited Deduction Cont.

• Sum of 25% of taxpayers allocable share of

W2 wages paid by the business, plus

• 2.5% of the taxpayers allocable share of the

unadjusted basis immediately after acquisition of all qualified property (tangible property subject to depreciation) Limited Deduction

• Deduction is then subject to a second

limitation equal to 20% of the excess of:

• Taxable income for the year, over
• The sum of net capital gain

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Other Important Considerations

• Aggregation Rules
• De Minimis Rule
• W2 Wages and Notice 2018-64
• Real Estate
• QBI Losses

Proactive Tax Planning

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Tax Planning

• Tax planning is necessary to take advantage
• f TCJA
• Reduction of taxable income as it relates to

Section 199A

• Fundamental accounting is critical
• Be proactive

Tax Planning Process

• Step 1 – Project gross income
• Step 2 – Consider tax strategies to reduce

taxable income

• Step 3 – Consider Section 199A
• pportunities
• Step 4 – Implement plan

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Accrual to Cash Change

• Moving from accrual to cash likely to

increase expenses and reduce taxable income

• Shareholder/member cost basis

considerations

• Financial reporting considerations

Retirement Planning

• Reducing taxable income via retirement plan
• ptions
• Review current plans and determine if more

advanced plans are necessary, i.e. cash balance plans

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Conservation Easements

• Limited to 50% of AGI, not 60% of AGI
• Working with reputable advisors is key
• Audit risk as a listed transaction
• More tax return disclosure requirements

Section 199A QBI

• Eligibility based on taxable income
• SSTB’s are still eligible if taxable income

below thresholds

• Loss carryforward
• Other considerations (REIT, Capital Gains)

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Comprehensive Example

Comprehensive Example

• Example 1
• Example 2
• Example 3

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Disclaimer

• Please consult with your tax professional regarding

the Section 199A qualified business income deduction and other provisions discussed in this

• presentation. Limitations and exclusions are not

mentioned in this presentation which may impact your individual tax situation.

Thank you, any questions?

Scotty Sykes, CPA, CGMA Direct: 252.632.0026 Email: scotty@sykes-cpa.com Twitter: @ScottySykesCPA Ollin B. Sykes, CPA.CITP, CMA Direct: 252.632.0012 Email: ollin@sykes-cpa.com Twitter: @OllinSykes