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Post-ElectionWhat You Need to Know for Tax Planning

Michael Minotti, CPAJim Forbes, CPA

December 6, 2016

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• Overview

• Proposed business tax changes

• Business tax changes 2016

• Proposed individual tax changes

• Individual tax changes 2016

• Likely extensions during lame-duck session

AGENDA

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OVERVIEWElection Results

• Trump wins electoral college 306-232

• Clinton wins popular vote 64.2M to 62.2M

• Republicans control both House and Senate

• House GOP blueprint released in June 2016

• Many potential changes on the horizon

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100-DAY PLANMiddle-class Tax Relief And Simplification Act• An economic plan designed to grow the economy 4% per

year and create at least 25 million new jobs through massive tax reduction and simplification, in combination with trade reform, regulatory relief, and lifting the restrictions on American energy

Repeal and Replace Obamacare Act • Fully repeals Obamacare and replaces it with Health

Savings Accounts, the ability to purchase health insurance across state lines, and lets states manage Medicaid funds

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TRUMP TAX PLANCOST OF THE

Taxfoundation.org – 10-year projection (09/19/2016)• Reduction in tax revenue of $4.4T

• When accounting for increase in economic growth, $2.6T

Tax Policy Center (10/18/2016)• Federal revenues fall $6.2T over the first decade

without interest

• Including interest, federal debt would rise $7.2T

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BUSINESS RATE CHANGESPROPOSED

Reduction in corporate tax rate

• Reduce rate from 35% to 15% for regular “C” corporation (House plan cuts rate to 20%)

Rate reduction for pass-throughs

• S corporations, partnerships, LLCs

• Currently taxed as high as 39.6% (proposed highest individual rate is 33%)

• 15% rate for small pass-throughs (House plan is 25%)

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RATE REDUCTIONPROPOSED PASS-THROUGH

• S corporations must pay a ‘reasonable’ salary to their owners

• Salary would be taxed at regular tax rate (proposed 33% highest rate)

• Anti-abuse rules

• “Business income” would be taxed at favorable 15% rate (25% under House plan)

• No definition for “small business”

• “Large business” would need to elect to be taxed as a regular corporation to get reduced rate. However, double tax would apply

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BUSINESS EXPENSINGPROPOSED

Full expensing of capital expenditures• All businesses under House plan

• Trump plan is only for manufacturing equipment

• Effort to reshape the business code to more of a consumption tax

Trade-off is limitation on interest expense deduction• Only to the extent of interest income

Repeal of most business incentives• R&D credit would be retained

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PROVISIONPROPOSED INTERNATIONAL

Current rule

• U.S. entities generally taxed on U.S. income

• Earnings of foreign subsidiaries generally not taxed until brought back to the U.S.

Deemed repatriation of offshore profits

• 10% tax rate (House plan 8.75% on cash, 3% on all other earnings)

• Regardless of whether money is actually brought back to the U.S.

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OFFSHORE PROFITS

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PROPOSED CHILD CAREIncentive for employers to provide on-site child care• Part of promise to provide more support to middle-class

families• Current law:

Employer gets tax credit of 25% of qualified expenses for on-site employee child care

Maximum of $150,000 per year Recapture of construction costs if facility closed

within 10 years• Proposal:

Increase the cap to $500,000 Shorten the recapture period to five years

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PATH ACTProtecting Americans from Tax Hikes Act of 2015 (PATH Act)

• Signed into law December 18, 2015

• Research tax credit made permanent (with improvements)

• Extension of bonus depreciation

• Extension of Section 179 deduction

• New filing deadlines

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RESEARCH TAX CREDITPATH ACT

Research tax credit

• Made permanent for the first time in 30 years

• Enhanced benefit to start ups

• Up to $250K credit against payroll taxes

• Less than $5M in gross receipts and no gross receipts outside of the last five years

• R&D credit also allowed against alternative minimum tax (AMT) for businesses with less than $50M in annual gross receipts

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BONUS DEPRECIATIONPATH ACT

Bonus depreciation

• 2016 and 2017 – still allowed 50% bonus depreciation

• 2018 – 40% bonus depreciation

• 2019 – 30% bonus depreciation

Note: Many states do not allow all or a portion of bonus depreciation

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SECTION 179PATH ACT

Section 179

• $500,000 annual limit made permanent

• Phase-out dollar-for-dollar for amounts over $2,010,000

• Indexed for inflation

Note: Many states may not follow the federal rule for Section 179

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FILING DEADLINESPATH ACT

New filing deadlines• Partnership – March 15 (was April 15)

Extended filing deadline: September 15

• C Corporations – April 15 (was March 15) Extended filing deadline: Still September 15 (10/15 in 2025)

• S Corporations – March 15 (no change) Extended filing deadline: September 15 (no change)

Note: State returns are usually due on the same date as the federal day or one month later

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INDIVIDUAL RATE CHANGESPROPOSED

Rate reduction and fewer brackets:• Current brackets: 10%, 15%, 25%, 28%, 33%, 35% and

39.6% 2017 highest rate applies at $418,400 for single,

$470,700 for married

• Proposed brackets for married filing joint: 12% - $0 - $75,000 25% - $75,001 - $225,000 33% - $225,001+ Single brackets would be half these amounts

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INCOME CHANGESPROPOSED INVESTMENT

Interest income• Trump noted no specific changes

• House plan taxes interest income at ordinary rates with a 50% exclusion (effective rates of 6%, 12,5%, and 16.5%)

Capital gains and qualified dividends• Trump proposes to retain current-law rates and brackets

• House plan taxes at ordinary rates with a 50% exclusion (effective rates of 6%, 12,5%, and 16.5%)

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MEDICARE TAXPROPOSED

Medicare Hospital Insurance Tax repealed

• Currently applies to wages and self-employment income on individuals with more than $200,000 and joint filers over $250,000

• Additional 0.9% employee tax (no employer match)

• Part of the Affordable Care Act (ACA)

• Additional tax would be repealed with the repeal of ACA

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NET INVESTMENT INCOMEPROPOSED

Net investment income tax repealed

• Currently applies ‘net investment income’ for individuals with more than $200,000 and joint filers over $250,000

• 3.8% additional tax (on top of 39.6% highest marginal rate)

• Part of the Affordable Care Act (ACA)

• Additional tax would be repealed with the repeal of ACA

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ITEMIZED DEDUCTIONSPROPOSED

Itemized deductions• Currently no cap on overall itemized deductions

• However, subject to phase-out for higher income taxpayers

• Up to 80% of itemized deductions can be phased out

Proposed itemized deductions• Capped at $100,000 for single filers,

$200,000 for joint filers

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EXEMPTIONSPROPOSED

Standard deduction and personal exemptions• Currently $12,700 for joint filers, $6,350 for single filers (2017)• Personal exemption: $4,050

Proposed standard deduction and personal exemptions• $30,000 for joint filers, $15,000 for single filers• Eliminate personal exemptions• Eliminate head-of-household filing status

House plan consolidates the standard deduction and personal exemption into one larger standard deduction• $12,000 for single, $18,000 for single with child, and $24,000 for

married

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INDIVIDUAL AMTPROPOSED

Alternative Minimum Tax (AMT)• Originated in 1969 to target 155 people with high incomes

that were paying zero federal income taxes

• Over 5M people pay AMT today

• AMT exemption amounts were recently indexed for inflation

Proposal• Eliminate

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AMT

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ESTATE TAXPROPOSED

Currently• Top rate of 40%• Exemption of $5.45M per spouse

Proposal• Repeal, but appreciated assets held at death will be

subject to capital gains tax to the extent they exceed $10M (unclear if this is per person or per couple)

• Eliminate the contribution of appreciated assets to a private charity established by the decedent or the decedent’s relatives

• House plan is complete repeal of estate tax

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EDUCATION CREDITSPATH ACT

American Opportunity Tax Credit

• Made permanent

• Annual credit up to $2,500 for tuition and related expenses

• Phased out for modified AGI beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation

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TUITION AND FEESPATH ACT

Tuition and fees deduction

• Extended through 2016

• Above-the-line deduction

• Qualified tuition and higher education expenses

• Capped at $4,000

• Phased out for AGI beginning at $65,000 for single filers and $130,000 for joint filers

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GAIN EXCLUSIONPATH ACT

Small business stock gain exclusion

• Made permanent

• 100% exclusion for small-business stock held more than five years

• Acquired after September 27, 2010

• C corporation with gross assets less than $50M

• Eliminates gain exclusion as AMT adjustment

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CHARITABLE IRAPATH ACT

Charitable giving from IRA• Made permanent

• Taxpayers aged 70½ or older

• Make direct contributions to qualified charitable organization

• Up to $100,000 per year

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SALES TAXPATH ACT

State and local sales tax• Made permanent

• Deduct state and local sales tax instead of state and local income taxes

• Valuable for individuals living in states without state and/or local income taxes

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MORTGAGE INSURANCEPATH ACT

Mortgage related benefits

• Deduct mortgage insurance premiums as interest

Extended through 2016

Phased out for taxpayers with AGI of $100,000 to $110,000

• Exclusion from gross income of mortgage loan forgiveness

Extended through 2016

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EDUCATOR EXPENSESPATH ACT

Educator expenses

• Above-the-line deduction for up to $250

• Books, supplies, computers and other equipment

• Made permanent

• Indexed for inflation

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TO BE EXTENDEDPROVISIONS LIKELY

More than 30 provisions set to expire at end of 2016:

• Mortgage insurance deduction

• Exclusion for home debt forgiveness

• Accelerated depreciation for racehorses and motorsport tracks

• Alternative fuel and biofuel and biodiesel credits

• Section 179D deduction for energy-efficient buildings

• Credits for non-wind and non-solar energy property

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CONTACT INFORMATION

Michael L. Minotti, CPAPartner

mminotti@skodaminotti.com 440-605-7133

Jimmy A. Forbes, CPAPartner

jforbes@skodaminotti.com 440-605-7156

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