income tax update - bkd · ‒no limitation if taxable income is < $160,725 single/$321,400...

INCOME TAX UPDATE

3

Key Takeaways

• Tax Reform

‒Where are we now?

‒What have we learned since enactment?

‒What guidance is still needed?

4

C Corporation Implications

• Tax rate reduced to 21% ‒ “permanent”

• Deferred taxes revalued in 2017

• Additional deferred taxes revalued in 2018 related to provision to return true-ups upon finalizing 2017 returns under SAB 118

• Impacts TCJA has on Effective Tax Rates ‒ 2016 - 2019

5


• AMT repealed – effective 1/1/2018

• Deferred tax asset considerations – recorded in 2017

• AMT credit carryover

‒2018-2020 ‒ reduces regular tax liability to zero; refund 50% of excess AMT credit carryover

‒2021 – refund remaining AMT credit carryover

‒ Implications to AMT credits limited under Sec. 383 – guidance still needed

‒ Interplay with general business credit carryovers

6


• Net Operating Losses (NOLs)

‒Carrybacks are no longer permitted for losses generated after 12/31/2017 (previously 2 year carryback)

‒Carryforwards are indefinite for losses generated after 12/31/2017 (previously 20 years)

‒ NOLs generated after 12/31/2017 are limited to 80% of taxable income for years beginning after 12/31/2017 (previously was 100%)

‒ Implications to deferred tax assets & Sec. 382 limitations

‒Losses generated in 2017 & prior years need to be tracked separately from losses generated after 12/31/2017

7


• Dividends received deduction

‒Less than 20% ownership – 50% deduction (previously was 70%)

‒20% ownership or more – 65% deduction (previously was 80%)

8


• Cash basis

‒Effective beginning 1/1/2018

‒Gross receipts cannot exceed $25M (previously was $5M)

‒Excess of $25M, accrual basis is required

‒Gross receipts are average of 3 previous years

‒For what size bank is this beneficial?

9


• Excessive Employee Remuneration – Sec. 162(m)

‒Deduction limited to $1M for covered employees

‒Covered employees include CEO, CFO & 3 most highly compensated officers

‒Once considered covered employee – always covered employee

‒Exceptions for performance based compensation, commission, & change in control payments were removed, e.g., now included as compensation subject to limitation – unless under written binding contract on or before 11/2/2017

10


• Excessive Employee Remuneration – Sec. 162(m)

‒Considerations for deferred tax assets related to performance based compensation

‒Considerations for Target short period/final tax return

11

S Corporation Implications

• Qualified business income (QBI) deduction under Sec. 199A

‒Deduction of 20% of QBI

‒Temporary – sunsets on 12/31/2025

‒Subject to limitations at shareholder levels

‒QBI – Ordinary income from qualified trade or business

Rental income/loss & impacts from tax credit partnership investments

‒Not QBI – Portfolio interest & dividend income, short & long term capital gains/losses

12


• Limitations of QBI deduction

‒No limitation if taxable income is < $160,725 single/$321,400 married filing jointly

‒ If taxable income exceeds $160,725 single/$321,400 married filing jointly Is the S corporation a specified service trade or business (SSTB)?

If yes, deduction begins phasing out & is eliminated if taxable income exceeds $210,725 single/$421,400 married filing jointly

If no, deduction is limited to the greater of

o 50% of total W-2 wages paid with respect to the business

o 25% of total W-2 wages paid with respect to the business plus 2.5% of the unadjusted basis (immediately after acquisition) of all qualified property

13


• Specified service trade or business (SSTB)

‒Any trade or business involving the following services Health, law, accounting, actuarial science

Investing & investment management

Trading or dealing in securities

Consulting

Financial services

Brokerage services

Principal asset is reputation or skill of employees or owners

14


• Specified service trade or business (SSTB)

‒Does banking fall under “financial services” NO! …… or at least not core banking

Regulations under Sec. 199A narrowly define financial services as “services provided by financial advisors, investment bankers, wealth planners & retirement advisors & other similar professionals, but do not include taking deposits or making loans”

15


• SSTB

‒ Implications to banks that provide the following services Wealth management

Trust services (advisory vs. fiduciary)

Loans sales (originating vs. purchasing)

‒Regulations under 199A establish a “deminimis” rule which allows a qualified business to include activities of SSTB as long as it does not exceed the following 10% of gross receipts if total gross receipts are $25M or less

5% of gross receipts if total gross receipts do not need exceed $25M

16


• SSTB

‒Multiple trades & businesses

‒Gross receipts calculation What is included?

17


• Tax return disclosures under Sec. 199A

‒Shareholders allocable share of QBI Must indicate what is SSTB & not SSTB

‒Shareholders allocable share of W-2 wages Three methods available for determining W-2 wages

‒Shareholders applicable percentage of unadjusted cost basis Tangible property subject to depreciation, e.g., no land

Up to 10 years after date placed in service or last full year of applicable recovery period

Allocated based on year-end ownership, not shareholder percentage

18


19

C & S Corporation Implications

• Business interest deduction limitation

‒Applicable to businesses with gross receipts of $25M or more

‒Limited to the sum of the following Business interest income

30% of “adjusted taxable income” – taxable income adjusted for the following

Business interest expense

Business interest income

NOLs

Depreciation, amortization & depletion (through 2022)

Pass through business deductions

20



‒Calculated on Form 8990

‒For pass-throughs (S corporations) – limitation is first determined at pass-through level

‒ If none (which is expected to be the case for financial institution S corporations) – the limitation is assessed at the shareholder level

21



‒Various information disclosed to S corporation shareholders to determine their respective limitation

‒Amounts may be disclosed in total or by S corporation shareholder allocable share Gross receipts – 3 previous years

Business interest income

Business interest expense

Adjusted taxable income (expected to be none for financial institutions)

22


• Bonus depreciation‒Pre-09/27/2017 – 40%‒09/27/2017 – 12/31/2022 – 100%

‒2023 – 80%

‒2024 – 60%‒2025 – 40%

‒2026 – 20%

‒2027 – 0%‒Available for new & used assets

‒Consideration for cost segregation study for asset acquisitions

23


• Bonus depreciation

‒“Leasehold improvement” property glitch

TCJA – certain 15 year & 39 year property not eligible for bonus

Bipartisan proposed Senate bill to correct glitch

Pre-TCJA – 15 year & certain 39 year property eligible for bonus

Qualified leasehold improvement property

Qualified restaurant property

Qualified retail improvement property

Qualified improvement property

24


25


• Sec. 179 depreciation

‒Deduction increased to $1M

‒Phase-out – increased to begin at $2.5M of qualifying assets placed in service

‒Available for new & used assets

‒Available for qualified improvement property, roofs, HVACs, fire protection, alarm systems & security systems

26


• Like-kind exchanges

‒Gain deferral only permitted on certain assets

Real estate

Assets not primarily held for sale

Gain no longer eligible for deferral for airplane exchanges

Banking equipment & vehicles

Other personal property

27


• 50% deductible meals

‒Furnished on the business premises of the taxpayer primarily for its employees

‒Directly related to business meetings for employees, stockholders, agents or directors

‒Client business meals not considered entertainment, amusement or recreation

‒Business meals during travel

28


• 100% deductible meals

‒ Included in an employee’s compensation

‒Reimbursed by another party

‒Provided for recreational, social or similar activities (including facilities), primarily for the benefit of employees (other than employees who are considered highly compensated)

‒Provided to the general public

‒Meals sold to customers

‒ Includible in income of persons who aren’t employees

29


• 100% deductible entertainment

‒Provided to the general public

‒Entertainment, amusement & recreation expenses directly related to business meetings for employees, stockholders, agents or directors

‒Entertainment sold to customers

‒ Includible in income of persons who aren’t employees

‒ Included in an employee’s compensation

‒Reimbursed by another party

‒Provided for recreational, social or similar activities (including facilities therefor), primarily for the benefit of employees (other than employees who are considered highly compensated)

30


• 100% nondeductible entertainment

‒All entertainment, amusement & recreation expenses not meeting one of the previously provided categories

‒Such nondeductible expenses may include entertaining at night clubs, cocktail lounges, theaters, country clubs, golf & athletic clubs, sporting events & hunting, fishing, vacation & similar trips

‒Business meals with clients at such entertainment events will be 50% deductible if separately itemized on the invoice

31


32


33


• Qualified transportation benefits

‒Employer may not deduct cost of qualified transportation fringe benefits Transportation in a commuter highway vehicle

Any transit passes

Parking

34


• Qualified transportation benefits

‒Parking

‒Employer pays third party for employee parking Amount is either taxable to the employee or nondeductible to the company

‒Employer owns or leases all or a portion of a parking facility Nondeductible parking expense “may be calculated using any reasonable method”

Using the value of employee parking to determine expenses allocable to employee parking in a parking facility is not a reasonable method of allocation

Safe-harbor under Notice 2018-99

35


• Notice 2018-99‒ Percentage of reserved employee spots

This percentage times the total parking expenses for the parking facility will be nondeductible.

‒ Primary use of the remaining parking spots If the primary use (for this purpose, greater than 50%) of the remaining parking spots is

for the general public, e.g., customers, clients, visitors, the remaining parking expenses will be deductible. Primary use is determined during the normal business hours of the organization.

‒ Percentage of parking spots reserved for non-employees If the primary use is not for the general public, the portion of parking expenses reserved

for non-employee use will generally be deductible.

‒ Typical employee use of any remaining parking spots The allocation of parking expenses to employee use of any remaining parking spots may

be based on actual or estimated usage by employees to determine any additional nondeductible amount. Actual or estimated usage may be based on the number of spots, the number of employees, the hours or use or other measures.

36


• BOLI transfer for value rules

‒TCJA added paragraph (3) to Section 101(a) as an exception regarding reportable policy sales

‒The term “reportable policy sale” means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business or financial relationship with the insured apart from the acquirer's interest in such life insurance contract. The term “indirectly“ applies to the acquisition of a partnership, trust or other entity that holds an interest in the life insurance contract.

37



‒Exception to transfer for value rules/reportable policy sale Officer, director or shareholder of acquirer

Death benefit remains nontaxable

No change to current tax treatment

‒Meet requirements of transfer for value rules/reportable policy sale Death benefit will be taxable upon receipt

Future income from BOLI is nontaxable timing difference

38



‒Proposed regulations issued March 2019

‒Proposed regulations provide for exception provided that life insurance contracts do not constitute more than 50% of the gross value of the acquired assets

‒Proposed regulations are favorable provision for financial institutions

‒ Income tax accounting implications for transactions that closed in 2018

39

S Corporation Revocation Considerations

• Is S corporation still the right answer?

‒Relatively few revocations have occurred Most are unique/specific situations, including ability to raise different forms of

capital & engage in specific types of acquisitions

Most centered around the need for continued payment of dividends

‒ Items for consideration Tax rates - current vs. future

S corporation election revocation process & impacts

Exit strategy

40


• Individuals‒Top rate of 37% – sunsets 12/31/2025‒20% QBI deduction – sunsets 12/31/2025

‒AMT

‒Limitation on SALT deduction

• Corporations‒Flat rate of 21% – “permanent”‒23.8% tax rate on qualified dividends – “permanent”

‒AMT repealed – “permanent”

‒No limitation on SALT deduction – “permanent”

41


• Revocation statement to be filed within the first 75 days of tax year (March 15 for calendar year taxpayers) in order to be effective in the current year

• Greater than 50% shareholder approval

‒100% shareholder approval to elect S corporation status

• 5 year re-election period

‒Once you revoke you must wait 5 years to re-elect S corporation status

42


• Deferred income taxes

‒Timing of recording deferred taxes ‒ the change in status from a nontaxable entity to a taxable entity should be reflected at the filing date, if approval is not necessary (which is the case under Sec. 1362)

• Deferred taxes should be provided at the date of change for temporary differences (at that date) that will reverse after the effective date

43


• Post termination transition period distributions

‒Distributions in year 1 as a C corporation post revocation can be from AAA

• Shareholder basis

‒Typically increases as an S corporation, but remains unchanged as a C corporation

44


• Eligible terminated S corporation (new under TCJA)

‒Revocation within 2 years of enactment of TCJA or by 12/22/2019

‒Ownership of stock is identical on date of revocation as on date of TCJA enactment (12/22/2017)

• Special rules for eligible terminated S corporations

‒Sec. 481(d) adjustments taken into income ratably over 6 years (rather than 4 years)

‒Post-revocation distributions pro-rated between AAA & AE&P

45


• Distribution requirements

‒This has moved the revocation needle

• Ability/need to raise capital

• Succession plan

‒Estate tax exclusion

‒Selling the bank?

‒Shareholder to sell interest in bank?

46

Missouri Tax Law Changes

46

• Change to corporate income tax rate – For years beginning on or after 1/1/2020, the corporate tax rate is reduced from 6.25% to 4%

• Reduction in Bank Franchise Tax rate from 7% to 4.48% for years beginning on or after 1/1/2020 (new law requires proportional rate reduction)

• The credit that could be used to reduce MO Bank Franchise tax or MO income tax equal to 0.01677% x (total assets less deposits) has been repealed for years beginning on or after 1/1/2020

• In computing MO income tax, effective 8/28/2019, interest on deposits held at a Federal Reserve Bank can be subtracted when computing taxable income

• The bank tax rate reduction compensates & avoids a bank tax increase due to the reduced credit for state income taxes caused by the state income tax rate reduction that is effective beginning on or after 1/1/2020

47

Other Missouri Tax Law Changes

47

• The individual tax rate for 2019 is 5.4% - down from a 6% rate in 2018 –this rate reduction will benefit employees receiving salaries, shareholders receiving dividends and S corporation shareholders receiving flow through income

• New for 2018 was a business income deduction of 5% of business income reported on an individual’s Schedule C and partnership & S corporation income reported on an individual’s Schedule E of their federal return

• 10% business income deduction for 2019

• Ultimately this deduction may to increase to 20%, 5% increments each year if the state’s general revenue increases by certain thresholds

48

Strategies to Reduce MO Taxes

• Acquire MO tax credits at a discount

• Apportionment benefits related to non-MO source income

• Use of investment subsidiary to reduce MO Bank Franchise Tax

• Use of REIT & investment subsidiary to reduce MO income tax & Bank Franchise tax

48

49

Use of Acquired Tax Credits

• Many MO tax credits are transferable & can be acquired at a discount (often priced between 92 & 95 cents for one dollar of credits)

‒LIHTCs

‒Historic credits

‒Various other credits

49

50

MO Apportionment Benefits

• MO allows apportionment factor to be reduced if MO taxable income includes wholly passive investment income from outside of MO

• This could include items such as non-MO municipal income & non-MO dividends

50

51

Illinois Tax Law Changes

51

• Franchise tax phase out from 2020 – 2024‒The tax is based on a corporation’s paid-in capital that is apportioned

to Illinois‒The Secretary of State administrates this tax & is currently

challenging the apportionment methodology‒Currently there is a tax amnesty program starting October 1 through

November 15 (covers 3/15/2008 & 6/30/2019)

• Threats of increasing the corporate & individual tax rates‒Corporate tax rates increasing from 7% to 7.99%, in 2021‒ Individual tax rates increasing from flat rate of 4.95% to graduated

rates to a high of 7.99% in 2021

52

Strategies to Reduce Illinois Taxes

• Acquire IL tax credits at a discount

‒Can acquire River Edge Credits at 91 cents

• Apportionment benefits related to non-IL source income

‒ Illinois allows apportionment factor to be reduced if IL taxable income includes non-IL source income Consider managing investment portfolio from outside of IL (income from securities

considered IL source income if managed within IL

• Enterprise Zone Investments Credits

52

Francis X. Godfrey, CPA | Partner | 314-802-0125 | [email protected]

income tax update - bkd · ‒no limitation if taxable income is < $160,725 single/$321,400...

Documents