The Tax Cuts and Jobs Act PR PRESENTED B BY Y TOB OBY C CLARY, - - PowerPoint PPT Presentation

The Tax Cuts and Jobs Act

PR PRESENTED B BY Y TOB OBY C CLARY, CPA PA, CVA VA

Soukup, Bush & Associates

Contact Information

• TOBY@SOUKUPBUSH.COM
• 970-223-2727

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The Tax Cuts and Jobs Act: Affects on Individuals

WHA HAT YOU N U NEED TO K KNOW I IN 20 2018

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The Tax Cuts and Jobs Act

• This is the largest tax reform in
• ver three decades.

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The Tax Cuts and Jobs Act

• For most Colorado taxpayers, this

Act will cut their tax liability from 2% to as high as 15%. However, we have seen some projections where taxes will go up for some Colorado taxpayers

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New Income Tax Rates & Brackets

Current Income Tax Brackets (MFJ) Current Tax Rate New Income Brackets (MFJ) New Tax Rate $0 – $18,650 10% $0 – $19,050 10% $18,650 – $75,900 15% $19,050 – $77,400 12% $75,900 – $153,100 25% $77,400 – $165,000 22% $153,100 – $233,350 28% $165,000 – $315,000 24% $233,350 – $416,700 33% $315,000 – $400,000 32% $416,700 – $470,700 35% $400,00 – $600,000 35% Over $470,700 39.6% Over $600,000 37% These new rates are effective for tax years beginning after December 31, 2017 and before January 1, 2026. Soukup, Bush & Associates

New Standard Deductions

Status Prior Standard Deduction New Standard Deduction Single/Married Filing Separately $6,350 $12,000 Head of Household $9,350 $18,000 Married Filing Jointly/Surviving Spouse $12,700 $24,000

• Due to the increase in standard deductions, many of your

regular itemized deductions may not be deductible on your tax return in 2018.

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Grouping of Itemized Deductions – Updating tax planning.

• Most importantly – Individual tax planning will now

include grouping itemized deductions in every other year for many taxpayers.

• What is Grouping?
• 2018:
• Prepay medical, property and income taxes, charitable for first

half of 2019,

• 2019:
• Standard Deduction
• 2020:
• Pay 2020 property taxes and prepay 2021 property taxes, last

half of 2019 contributions, 2020 contributions and first half of 2021 contributions. 2020 medical and prepay any others.

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Charitable Contributions

• The new law makes the following changes to the

deduction for charitable contributions for individuals:

• Increases the income-based percentage limitation to

60% (up from 50% for public charities and certain private foundations)

• Disallows the charitable deduction for payments

made in exchange for college athletic event seating rights

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Mortgage & Home Equity Indebtedness Interest Deduction

• Under the new law, the deduction for mortgage

interest is limited to underlying indebtedness of up to $750,000 (for mortgages instated after December 15, 2017) through 2025.

• The new law also suspends the deduction for interest
• n home equity indebtedness for certain HELOCs,

through 2025. Prior HELOCs are not grandfathered in Note: Binding contracts entered into during 2017, and refinances after year-end 2017 will not apply.

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Alimony and Separate Maintenance Payments

• The new law makes the following changes to

the individual taxation rules of alimony payments, effective for any divorce or separation instrument executed after December 31, 2018.

• Alimony payments made by the payor spouse

are not deductible.

• Alimony payments received by the receiving

spouse are not includable in income.

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Alimony and Separate Maintenance Payments

• NOTE: divorce agreements executed

before December 31 , 2018 but modified after December 31, 2018 will be also subject to this new rule. Planning point: finalize or modify divorce or separation agreements by year-end 2018.

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Child Tax Credit

• Under the new law, the child tax credit has been

modified as follows, through 2025.

• Credit increased to $2,000 per qualifying child
• $1,400 refundable amount per qualifying child
• Provision to provide a $500 nonrefundable credit for

qualifying dependents other than qualifying children

• Adjusted gross income phase-out amount increased to

$400,000 for MFJ ($200,000 for all others). Note: dependent must have a SSN, not just a TIN.

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Personal Residence Gain Exclusion

• Good news!! The personal residence

gain exclusion has NOT BEEN MODIFIED.

• Taxpayers selling their principal

residence can still exclude gain up to $500,000 (MFJ) or $250,000 (others) if they have lived in the residence for 2 of the last 5 years.

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Alternative Minimum Tax

• Under the new law, the AMT exemption

amounts are as follows:

• MFJ and Surviving Spouse: $109,400
• Single: $70,300
• MFS: $54,700
• The phase-out amounts have also increased:
• MFJ and Surviving Spouse: $1,000,000
• All others: $500,000

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Taxation of Business Income

• The new tax law considerably complicates the

taxation of small business income for owners of such entities.

• We’ll dive right in…

“It is estimated that the provision will affect over ten percent of small business tax returns…” – Conference Agreement

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20% Qualified Business Income Deduction

• Qualified business, other than C-Corporations will

get to deduct 20% of their Qualified Business Income, subject to two limitations, on their individual tax return

• They are not a Specified Service Business
• They have W-2 wage expense or capital investments

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Specified Service Business Defined

• A specified service trade or business means any trade or

business involving the performance of services in the fields of:

• Health
• Law
• Consulting
• Athletics
• Financial services
• Brokerage services
• Any trade or business where the principal asset of such trade or business is the

reputation or skill of one or more of its employees or owners

• Or which involves the performance of services that consist of investing and

investment management trading, or dealing in securities, partnership interests,

• r commodities.

Note: Engineers and Architects are not classified as specified service businesses Soukup, Bush & Associates

Deduct from Owner’s Taxable Income** = 1 Plus 2

• 1. Lessor of A or B:
• A. Combined Qualified Business Income (I + II) (Income, gain, deductions,

losses, including deduction for reasonable owner compensation)

• I. 20% of QBI, to not exceed wage limitation
• II. 20% of Aggregate Qualified REIT

dividends & Qualified PTP income

• B. [Owner’s Taxable Income – (Net Capital Gains +

Qualified Cooperative Dividends)] x 20%

• 2. Lessor of C or D:
• C. 20% Qualified Cooperative Dividends
• D. (Owner’s Taxable Income – Net Capital Gains)

Wage Limitation^^, Greater of:

• i. 50% of W-2 wages
• ii. 25% of W-2 wages plus

2.5% of the unadjusted basis

• f qualified property

Plus

Plus

Taxation of Business Income

** NOTE: For specified service business,

• wner’s with taxable income above $315,000

(MFJ) will have this deduction phased-out. Phase-out is complete after $415,000. ^^ NOTE: Wage limitation is phased-in for

• wner’s with taxable income above $315,000.

Phase-in is complete after $415,000. (Applies to ALL businesses, not just service).

Taxation of Business Income: Exclusion Phase-Out

Clarification on exclusion phase-out for specified service businesses

• For specified service business, owners with taxable

income above $315,000 (MFJ) will have this entire deduction phased-out. Phase-out is complete after $415,000.

• In other words, if an owner of a specified service

business has taxable income under $315,000, they will get the full benefit of this new deduction.

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Taxation of Business Income: Wage Limitation Phase-In

Clarification on phase-in for wage limitation

• For ALL business entities, the wage limitation is

phased-in for owner’s with taxable income above $315,000. Phase-in is complete after $415,000.

• In other words, if an owner has taxable income under

$315,000, they will not be subject to the wage limitation.

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Other Changes of the New Law

• Suspension of the deduction for personal

exemptions.

• Suspension of the deduction for personal

casualty and theft losses, except in disaster relief areas declared by the President.

• Repeal of overall limitation on itemized

deductions.

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Other Changes of the New Law (cont.)

• Section 529 plans to allow distributions ($10,000 or

less per student) for tuition incurred in connection with the enrollment or attendance at a public, private or religious elementary or secondary school.

• Recharacterization to unwind a Roth IRA

conversion/rollover no longer allowed.

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Other Changes of the New Law (cont.)

• Wagering (gambling) losses definition to

include expenses incurred in carrying out wagering transactions (such as travel to or from a casino).

• Suspension of the deduction for moving

expenses.

• Qualified tuition programs (529 Plans) can be

rolled over to ABLE accounts without penalty, within the same family.

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Other Changes of the New Law (cont.)

• Repeal of Obamacare Individual health care

mandate, for months beginning after December 31, 2018.

• Estate tax exemption increased to $10 million

(indexed for inflation), through 2025.

• Expanded due diligence requirements for paid

preparers to cover determining eligibility for taxpayers filing HOH.

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Other Changes of the New Law (cont.)

• Kiddie tax: taxable income of a child (EARNED) is taxed

under the rates for single individuals; taxable income of a child (UNEARNED) is taxed according to brackets applicable to trusts and estates.

• NOT MODIFIED: Exclusion for education program

assistance, exclusion for qualified tuition reductions for graduate level students, deduction for qualified tuition and related expenses, student loan interest deduction, AOTC and Lifetime Learning Credit.

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The Tax Cuts and Jobs Act: Affects on Businesses

WHA HAT YOU N U NEED TO K KNOW I IN 20 2018

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Corporate Tax Rates

• The corporate tax rates have been reduced

from the prior graduated tax rates of 15%, 25%, 34% and 35%.

• For tax years beginning after December 31,

2017, the new law for the corporate tax rate is a flat 21% rate.

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Alternative Minimum Tax

• The prior 20% tax rate for corporate AMT is being

repealed, for tax years beginning after December 31, 2017

• For tax years between January 1, 2018 and

December 31, 2021, the AMT credit is refundable and can offset the regular corporate tax liability by 50% (100% for the 2021 tax year) of the excess of the minimum tax credit for the year over the amount of the credit allowed against the regular tax liability. (100% for the 2021 tax year)

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Increased §179 Expensing

• The new law will increase the maximum §179

expense from $500,000 to $1 million.

• In addition, the phase-out threshold will be

increased from $2 million to $2.5 million.

• The sport utility vehicle limitation will stay at

$25,000.

• All of the above thresholds will be indexed for

inflation for tax years beginning after 2018.

• This new law will apply to tax years beginning

after December 31, 2017

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Qualified Real Property

• Qualified real property eligible for §179

expensing is expanded to include the following improvements:

• Roofs
• Heating
• Ventilation
• Air-conditioning Property
• Fire Protection and Alarm

Systems

• Security Systems
• This new law will apply to tax years beginning

after December 31, 2017

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Bonus Depreciation

• The new law will allow 100% bonus

depreciation for property placed in service after September 27, 2017 and before January 1, 2023.

• This additional first-year depreciation

deduction is allowed for new and used property.

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Bonus Depreciation (cont.)

Placed in Service Year Bonus Depreciation Percentage Qualified Property in General/Specified Plants Portion of Basis of Qualified Property Acquired after Sept. 27, 2017

• Sept. 28, 2017 –
• Dec. 31, 2022

100% 2023 80% 2024 60% 2025 40% 2026 20% 2027 None 2028 and thereafter None

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Farming Equipment and Machinery

• Currently, farming equipment and machinery

has a 7-year recovery period.

• Under the new tax law, for farming equipment

and machinery placed in service after December 31, 2017, a 5-year recovery period will be applied.

• The 150% declining balance method which was

previously required for property used in a farming business is repealed. 200% DB will now apply.

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Qualified Improvement Property

• The individual definitions of qualified

leasehold improvements, qualified restaurant and qualified retail improvement property are removed with the new tax law.

• A 15-year recovery period and straight-line

depreciation will apply to qualified improvement property.

• This property will be referenced to as

“qualified improvement property”.

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Qualified Improvement Property (cont.)

• Under the new law, qualified improvement property

placed in service after December 31, 2017 is generally depreciable over 15 years (S/L), without regard to:

• Whether the improvements are on property

subject to a lease,

• Whether the improvements were placed in service

three years after the building was placed in service,

• Whether the improvements were made to a

restaurant building.

• Whether the property is used by a related party

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Business Interest Deduction

• Under the new law, some businesses will be

subject to a limitation of the deduction of net interest expense.

• Net interest expense in excess of 30% of the

business adjusted taxable income* will be disallowed (but see exception on next slide).

• This is determined at the tax filer level, except for pass-

through entities which would be determined at the entity level. *Adjusted taxable income is determined without regard to depreciation, amortization or depletion deductions

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Business Interest Deduction (cont.)

• Exemption to the previous limitation:
• Taxpayers with average annual gross receipts

for the three-tax year period, ending with the prior taxable year, that do not exceed $25 million are not subject to the interest deduction limitation.

• There are a handful of other obscure

exceptions noted in the new law, including allowing deduction for dealership flooring lines of credit.

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NOL Deduction

• Currently, a net operating loss (NOL) may

be carried back two years and carried forward 20 years as an offset to taxable income.

• Under the new tax law, the two-year

carryback provision is repealed.

• However, for certain losses incurred in

farming business, the two-year carryback may still apply.

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NOL Deduction (cont.)

• For NOLs originating in tax years beginning

after December 31, 2017, the NOL deduction is limited to 80% of taxable income (without regard to the deduction) and can be carried forward indefinitely.

• Exception – For property and casualty

insurance companies, NOL’s may be carried back two years and carried forward 20 years and offset 100% of taxable income.

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DPAD Deduction

• The current domestic production activities

deduction (DPAD) is 9% of the lesser of qualified production activities income or taxable income for the year.

• With the new law, this deduction is

repealed as of December 31, 2017 for non- corporate taxpayers and December 31, 2018 for C corporations.

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Like-Kind Exchanges

• Currently, like-kind exchanges can be applied

to property ranging from real estate to tangible personal property held for business use to property held for investment purposes.

• The new law is only allowing like-kind

exchanges for real property. Personal property no longer qualifies. That means NO AUTOS!

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Like-Kind Exchanges

• Under the new law, this applies to

transfers made after December 31, 2017.

• Transfers in progress as of this date do

not fall under the new law (i.e. relinquished property has been disposed, or replacement property has been purchased)

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Research Expenses

• Taxpayers are allowed a deduction for certain

research and experimentation (R&E) expenses paid in relation to a trade or business under pre-Act law.

• Under the new law, certain R&E expenses must be

capitalized and amortized over 5 years, beginning in the midpoint of the tax year all of the expenses were incurred.

• This would apply to tax years beginning after

December 31, 2021.

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Research Expenses (cont.)

• Expenses excluded from the capitalization

requirement:

• Expenses for land or for depreciable or

depletable property used with the research

• Exploration expenses related to ore or other

materials (oil and gas).

• If the property related to the R&E expenses is

disposed of, the capitalized R&E expenses must continue to be amortized over the remainder of the period (cannot write these off in the year of disposal).

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Entertainment Expenses

• Previously, meals and entertainment expenses

50% deductible.

• Under the new law, entertainment expenses are

no longer allowed as a deduction for amounts paid after December 31, 2017 for client related

• expenses. Expenses related to employees is still

deductible at 50%.

• The 50% limit on the business meal deduction is

also expanded to include meals provided through an in-house cafeteria or on the employer premises.

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Credit for Employer-Paid Family and Medical Leave

• Currently there is not a credit available to employers

for compensation paid to employees while on a leave.

• For wages paid for tax years beginning January 1,

2018 through December 31, 2019, the new law will allow a business to claim a credit of 12.5% of the wages paid to employees on family and medical leave (FMLA), if the rate of payment is 50% of the employee’s normal wages.

• The credit is possibly increased to 25% depending on the

percentage of wages paid to the employee while on leave

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Accounting Method Changes – Taxable Year of Inclusion

• Currently, businesses are required to use the accrual

method of accounting if their average annual gross receipts exceeds $5 million.

• Under the new law, this threshold is increased to $25

million.

Note on qualified personal service companies: qualified personal service corporations, partnerships without C corporation partners, S corporations, and other pass-through entities are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the method clearly reflects income.

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Other Changes You Will Never See…

• Deduction for amounts paid for any

settlement, payout or attorney fees related to sexual harassment is disallowed.

• Limitation of $1 million compensation for

covered employee of a publicly traded company repealed.

• Deduction for local lobbying expenses

eliminated.

• Orphan drug credit decreased to 25% of

qualified clinical testing expenses (from 50%).

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Other Changes You Will Never See…

• Rehabilitation credit for certified historic

structures limited to 20% claimed ratably

• ver 5 years.
• Generally, no deduction is allowed for fines
• r penalties paid to a government for the

violation of any law. The new law creates an exception for restitution payments, or amounts required to come into compliance with any law that was violated, that are identified in a court order.

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Other Changes You Will Never See…

• The new law provides an opportunity to

defer capital gain income temporarily, if income from capital gains is reinvested into a “Qualified Opportunity Fund” within 180 days.

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The Tax Cuts and Jobs Act: Other Provisions

WHA HAT YOU N U NEED TO K KNOW I IN 20 2018

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PARTNERSHIP PROVISIONS

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Repeal of Partnership Technical Termination

• Under the new law, the following

situations would still terminate the partnership:

• Having less than two partners
• The partnership ceases operations

and closes

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The Tax Cuts and Jobs Act: Foreign Provisions

WHA HAT YOU N U NEED TO K KNOW I IN 20 2018

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Participation Exemption System

• Prior law provides that all income

(worldwide) is subject to taxation for US taxpayers

• Foreign income earned by foreign entity that

is owned by US persons is not taxable until the money is paid to the US shareholder (known as repatriation)

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Participation Exemption System

• The first provision in the new law would only

affect C Corporations

• Affected C corporations are those with a

foreign subsidiary that has foreign source income

• The corporation gets a deduction for the

portion of the dividends received from the subsidiary that are foreign source

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Participation Exemption System

• No foreign tax credit is allowed for the

portion of the dividends excluded

• There is a holding period requirement
• The purpose of this provision is to encourage

repatriation of money back into the US economy

• Effective tax year 2018

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Deemed Repatriation

• The second portion of the new participation

exemption system is a deemed repatriation

• This affects individuals and C corporations
• The deemed repatriation is effective for the

2017 tax year!

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Deemed Repatriation

• The deemed repatriation:
• Applies to shareholders who own 10% or

more of a foreign corporation

• Include in income the ending 2017

accumulated earnings and profits (E&P)

• Tax rate varies between 15.5% and 8%
• There is a special provision for S Corporation

shareholders

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Deemed Repatriation: Election

• Election available to spread tax over 8 years
• More guidance is needed on how and when

to file this election (may be due April 2018)

Year Percentage Owed 1 through 5 8% of liability 6 15% 7 20% 8 25%

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Rules Related to Passive and Mobile Income

• Effective for 2018, the new law would treat a

Controlled Foreign Corporation (CFC), similar to a passthrough entity

• Shareholders of a CFC include the income

from the CFC each year

• Not all of the income flows through, there are

exceptions

• A special deduction is available to C corps

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References

• Joint Explanatory Statement of the Committee of

Conference, Issued December 15, 2017.

• 2017 Tax Reform: Checkpoint Special Study on Individual

Tax Changes in the "Tax Cuts and Jobs Act", Federal Taxes Weekly Alert (12/21/2017)

• 2017 Tax Reform: Checkpoint Special Study on Business

Tax Changes in the "Tax Cut and Jobs Act", Federal Taxes Weekly Alert (12/21/2017)

• 2017 Tax Reform: Checkpoint Special Study on S corp,

partnership & other changes in the "Tax Cuts and Jobs Act", Federal Taxes Weekly Alert (12/21/2017)

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References (cont.)

• 2017 Tax Reform: Checkpoint Special Study on foreign

income, foreign persons tax changes in the "Tax Cuts and Jobs Act", Federal Taxes Weekly Alert (12/21/2017)

• 2017 Tax Reform: Client Letter on last-minute year-end

moves in light of Tax Cuts and Jobs Act, Federal Taxes Weekly Alert (12/21/2017)

• “House forced to revote on GOP tax bill Wednesday” 2017

Boston Globe Media Partners, LLC. December 19, 2017.

• Checkpoint: 2017 Tax Reform Complete Analysis of the

Tax Cuts and Jobs Act, Chapter 700 Qualified Business Income.

• Checkpoint: 2017 Tax Reform Complete Analysis of the

Tax Cuts and Jobs Act, Chapter 702 Qualified Business Income Defined.

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Contact Information

• TOBY CLARY:

TOBY@SOUKUPBUSH.COM

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Interesting Tax Bill Calculator

• https://www.nytimes.com/interactive/20

17/12/17/upshot/tax-calculator.html