webinar - tax reform 01 11 18 final - cohen & company€¦ · individual tax reform agenda ›...

Understanding Tax Reform: How Will It Impact You & Your Business?

MODERATOR:

› TRACY MONROE, CPA, MT

January 11, 2018© Cohen & Company, Ltd.

› TONY BAKALE, CPA, MT › ANDY WHITEHAIR, CPA/PFS, AEP› RAY POLANTZ, CPA, MT› PETER GILROY-SCOTT, CPA

PANELISTS:

Welcome & Introductions

Tracy Monroe, CPA, MTPartner, Tax

Panelists

Tony Bakale, CPA, MTPartner & Technical Director, Tax

Andy Whitehair, CPA/PFS, AEPPartner, Tax & Family Wealth

Ray Polantz, CPA, MTPartner, Tax

Peter Gilroy-Scott, CPADirector, Tax

Moderator

Background

Impact on Individuals

Individual Tax Reform Agenda

› Individual tax rates› Standard deduction, exemptions and credits› Itemized deductions› Alternative Minimum Tax (AMT)› Miscellaneous› Observations› Estate & GST tax

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Individual Tax Reform

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Individual tax reform changes sunset after 2025,

at which point old tax law comes back into force.

Individual Tax Rate Changes – Married Filing Jointly

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Income Range Old Law New Law Change$0 to $19,050 10% 10% None$19,050 to $77,400 15% 12% Decrease$77,400 to $156,150 25% 22% Decrease$156,150 to $165,000 28% 22% Decrease$165,000 to $237,950 28% 24% Decrease$237,950 to $315,000 33% 24% Decrease$315,000 to $400,000 33% 32% Decrease$400,000 to $424,950 33% 35% Increase$424,950 to $480,050 35% 35% None$480,050 to $600,000 39.6% 35% Decrease$600,000 and over 39.6% 37% Decrease

Individual Tax Rate Changes – Single

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Income Range Old Law New Law Change$0 to $9,525 10% 10% None$9,525 to $38,700 15% 12% Decrease$38,700 to $82,500 25% 22% Decrease$82,500 to $93,700 25% 24% Decrease$93,700 to $157,500 28% 24% Decrease$157,500 to $195,450 28% 32% Increase$195,450 to $200,000 33% 32% Decrease$200,000 to $424,950 33% 35% Increase$424,950 to $426,700 35% 35% None$426,700 to $500,000 39.6% 35% Decrease$500,000 and over 39.6% 37% Decrease

Individual Standard Deduction, Exemptions and Credits

› Standard deduction not quite doubled- Single/Separate: $12,000- Joint: $24,000- HOH: $18,000

› Personal exemptions eliminated › Child and family credit expanded

- $2,000 per qualifying child under 17 ($1,000 in 2017)- Phase-out increased to $400,000 for joint filers (used to be $110,000)- $500 credit for other dependents (new in 2018)

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Individual Itemized Deductions

› State and local taxes, including income taxes, real estate taxes and personal property taxes, limited to $10,000- Anti-abuse provision in 2017 eliminates deduction in 2017 for

prepayments of state and local income taxes for tax years in 2018 and beyond

› Mortgage interest expense limited on new acquisition debt in excess of $750,000- Home equity interest expense no longer deductible and no grand-

fathering› Charitable contribution AGI percentage limitation increased from

50% to 60% for cash contributions10

Individual Itemized Deductions (continued)

› Personal casualty losses eliminated except for federal disaster areas› Medical expenses AGI threshold reduced from 10% to 7.5% for 2017

and 2018 (reverts in 2019)› Miscellaneous 2% deductions eliminated

- Investment fees, job expenses, tax preparation fees, etc.› Pease limitation eliminated (overall itemized limitation)

- Effectively used to be an additional 1% to 1.2% surtax on joint incomes over $313,800

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Individual Alternative Minimum Tax (AMT)

› Modified but not repealed as initially discussed› AMT exemption increased› AMT phase-out increased › Result:

- Itemized deduction limitations (notably state and local taxes) will result in fewer AMT addbacks

- Far fewer taxpayers subject to AMT- Possible benefit from minimum tax credits from prior years

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Individual Miscellaneous Changes

› Kiddie tax simplified but subject to trust tax rates- 37% rate on income over $12,500

› Roth re-characterizations no longer allowed to undo a Roth conversion

› Alimony paid deduction eliminated for divorces executed after 12/31/18- Could see more divorces in 2018

› Moving expenses eliminated› 529 “college” savings plans will allow up to $10,000 for “qualified

expenses” for elementary and high school

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Individual Tax Observations

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› Tax brackets have expanded and rates have dropped with only a couple of minor exceptions

› Capital gains tax rate remains unchanged› Net investment income tax (3.8% tax) still in effect› Fewer itemized deductions

- Consider bunching of expenses such as large, single-year contributions to a donor advised fund (DAF)

- Consider ways to deduct state and local real or personal property taxes incurred in a trade or business

› Expanded child and dependent credits help mitigate exemption elimination

Estate and GST Tax

› Estate, gift and Generation Skipping Transfer (GST) taxes retained› Lifetime exclusion amount and GST exemption increased to $11.2 million

but sunsets after 2025› “Stepped-up” basis retained› Observations:

- Very few taxable estates (likely all will be audited now)- State estate taxes may still be applicable (MD, NY, PA, for example)- Increased importance of income tax basis planning - Continued importance of non-tax estate planning- Unclear how sunset or future exemption changes will impact prior year

planning - Will there be a claw-back?- Flexibility will be key

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Impact OnBusinesses

Business Tax Rate Change

› Effective for 1/1/18 the corporate tax rate will be 21%› Fiscal years will calculate tax under Section 15

- Tax to be calculated using both the old and the new rates on the full-year taxable income then prorate the two amounts based on days

› Dividends received deductions for domestic dividends are right-sized for rate change- 80% exclusion becomes 65%- 70% exclusion becomes 50%- New income limitations apply

› Business AMT repealed

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Business Provisions

› 20% Small Business Deduction- Available to businesses operated as flow-through (i.e., entities and sole

proprietorships)- Certain specified service businesses excluded- Investment businesses excluded- Claimed at the individual (or estate or trust) level- Deduction limited to lesser of:

- 20% of modified taxable income or - the greater of:

- 50% of W-2 wages or- 25% of W-2 wages and 2.5% of capital amount

- Special rules for lower income taxpayers- Not deductible for self-employment taxes

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Business Section 179 & Depreciation

› Section 179 increases to $1 million with higher phase out- Unified definition for real estate improvements- Certain improvements to buildings qualify (e.g., roofs, HVAC, alarm systems,

etc.)› Bonus depreciation increases to 100% for property placed in service after

9/27/17 and before 1/1/23- Rate phases down after 12/31/22 by 20% per year- Eligibility broadened to include

- Used property/new to taxpayer rule- Films, television shows and theatrical productions

- Public utilities and certain taxpayers electing special interest expense provision are excluded

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Business Income & Deductions

› Like-kind exchanges retained for real property› New interest expense limitations

- Limited to 30% of adjusted taxable income plus business interest income- Floor plan financing interest fully deductible- Excess interest carried forward- Small taxpayer exceptions

› Net operating losses (NOLs)- No carryback available; carryforward unlimited- Limited to 80% of pre-NOLs taxable income

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Business Income & Deductions

› R&D expenses – beginning after 2021- Domestic expenses capitalized and amortized over 5 years- Foreign expenses capitalized and amortized over 15 years- All software development costs treated as R&D

› New limits on entertainment, meals and certain employee benefits

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Business Accounting Methods

› Cash method limitation increased to $25 million average annual aggregate gross receipts (AAAGR)

› Exception to uniform capitalization rules expanded and capped at $25 million AAAGR

› Financial statement conformity rule for certain deferred income

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Business Credits

› Historic tax credits- 10% credit repealed- 20% credit extended - claimed ratably over 5 years

› New Markets Tax Credit (NMTC)- 2018 and 2019 allocations remain intact

› AMT credit- Available to offset regular taxes after other credits- 50% of excess credit refundable for years 2018 – 2020- 100% of excess credit refundable for 2021

› New family leave credit available› R&D credit retained

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Impact On Funds, Managers &

Investors

Overview of Impact on Funds, Managers and Investors

› Carried interest holding period- For tax years after 12/31/17, a three-year holding period of the

underlying assets (and allocated partnership interest) is required for long-term capital gain treatment

› Management fee and the elimination of 2% AGI deductions - For tax years after 12/31/17 and before 1/1/26, the deductions for

management fees and incentive structured as a fee are suspended if the fund is an investor fund

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› Corporate rate- For tax years after 12/31/17, corporations are subject to a flat rate of

21% › Pass-through deduction

- For tax years after 12/31/17 and before 1/1/26, a 20% deduction is permitted for “qualified business income” flowing through a pass-through entity

› Accounting method changes- For tax years after 12/31/17, a corporation and a partnership with

corporate partners are allowed to use cash method if receipts are less than $25 million for the past three years

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› Excess compensation benefits- For tax years after 12/31/17, performance based remuneration paid by a

corporation to a covered employee is limited to $1 million- Definition of a covered employee is expanded to include a principal executive

officer, principal financial officer and the three highest paid officers› Limited state and local tax (SALT) deduction

- For tax years after 12/31/17 and before 1/1/26, SALT is deductible by a trade or business, however, individual taxpayers are limited to $10,000 (married filing jointly)

› Tax-exempt organizations- For tax years after 12/31/17, a 1.4% excise tax is imposed on net investment

income of certain private colleges and universities

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› Temporary 100% expensing - 100% first-year deduction is allowed for property acquired and placed in

service after 9/27/17 and before 1/1/23› Business interest expense limitation

- For tax years after 12/31/17, any business regardless of form (e.g., corporation or pass-through) is subject to a disallowance of business interest expense in excess of 30% of the business’s adjusted taxable income

› Look-through rule for sale of partnership interest- On or after 11/27/17, gain or loss from the sale of a partnership interest is

treated as effectively connected with a U.S. trade or business to the extent a foreign partner would have had effectively connected income if the partnership had disposed of all its assets at fair market value on the date of the interest disposition

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› 100% deduction for foreign-source portion of dividends- For tax years after 12/31/17, a domestic corporation that is a 10% or

more U.S. shareholder of a foreign corporation is allowed a 100% dividends received deduction for foreign-source dividends received; no foreign tax credit is allowed

› Deemed repatriation of previously untaxed earnings- For tax years after 12/31/17, U.S. shareholders of a controlled foreign

corporation must include in income their global intangible low-taxed income (GILTI)

- CFC shareholders also must include in income all untaxed E&P earned prior to 11/2/17 or 12/31/17, whichever date produces the greater result

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What Remained Unchanged?

› Taxation of investment income unchanged- The tax rates for capital gains is unchanged- 3.8% net investment income tax remains- Specific lot identification is still allowed

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Impact On International Business

International Provisions

› Establishment of participation exemption system for taxation of foreign income- Deduction for foreign-source portion of dividends received by domestic

corporations from specified 10% owned foreign corporations- Foreign tax credit/deduction disallowance- Available only to domestic corporate shareholders (not including RICs or

REITs)

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› Establishment of participation exemption system for taxation of foreign income (cont.)- Special rules relating to sales or transfers involving specified 10% owned

foreign corporations- Sale of stock by U.S. persons - Reduction in basis of certain foreign stock- Sale by a controlled foreign corporation (CFC) or a lower-tier CFC- Inclusion of transferred loss amount in certain asset transfers- Repeal of active trade or business exception

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› Deemed repatriation of foreign income upon transition to participation exemption- Inclusion of pro-rata share of accumulated post-1986 deferred foreign

income- Reduced effective tax rates

- 15.5% for cash earnings- 8% for other earnings

- Excludes passive foreign investment companies (PFICs) that are not CFCs- Applies to any 10% U.S. shareholder

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› Deemed repatriation of foreign income upon transition to participation exemption (cont.)- Partial disallowance of foreign tax credits- Election to increase percentage of domestic taxable income offset by

overall domestic loss treated as foreign source- Installment payment option- Special rule for S corporations and REITs

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› Modification of foreign tax credit system- Repeal of Sec. 902 indirect foreign tax credits- Determination of Sec. 960 foreign tax credit on current year basis- Source of income from sales of inventory determined solely on basis of

production activities- Separate foreign tax credit limitation basket for foreign branch income

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› Modification of subpart F provisions- Inflation adjustment of de minimis exception for foreign base company

income- Elimination of requirement that corporation must be controlled for 30

days before subpart F inclusions apply- Modification of stock attribution rules for determining CFC status- Modification of definition of U.S. shareholder

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› Modification of subpart F provisions (cont.)- Current year inclusion of foreign high-return amounts or global

intangible low-tax income by U.S. shareholders- Repeal of inclusion based on withdrawal of previously excluded

subpart F income from qualified investment- Repeal of treatment of foreign base company oil related income as

subpart F income

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› Rules related to passive and mobile income- 37.5% deduction for foreign derived intangible income (FDII)

- Property sold to non-U.S. customer for use outside U.S.- Includes any lease, license, exchange or other disposition- Services provided to any person or with respect to the property not

located within the U.S.- Available only to domestic corporations (not RICs or REITs)

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› Rules related to passive and mobile income (cont.)- 50% deduction for global intangible low-taxed income (GILTI)- Subpart F modifications make GILTI currently taxable- 80% deemed-paid foreign tax credit- Available only to domestic corporations (not RICs or REITs)

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› Prevention of base erosion- Current year inclusion by U.S. shareholders with foreign high returns- Excise tax on certain payments from domestic corporations to related

foreign corporations; election to treat such payments as effectively connected income

- Applicable taxpayers are domestic corporations that have average annual gross receipts of $500 million and a base erosion percentage of 3%

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› Other international reforms- Restrictions on insurance business exception to passive exception to

passive foreign investment company rules- Repeal of fair market value of interest expense apportionment

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Questions & Answers

Contact Information› Moderator

Tracy Monroe, CPA, MTPartner, [email protected]

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› PanelistsTony Bakale, CPA, MTPartner & Technical Director, [email protected]

Andy Whitehair, CPA/PFS, AEPPartner, Tax & Family [email protected]

Ray Polantz, CPA, MTPartner, [email protected]

Peter Gilroy-Scott, CPADirector, [email protected]

Thank you.

Information presented is not meant to constitute legal, accounting or other professional advice. Any action taken based on information in this presentation should be taken only after a detailed

review of the specific facts and circumstances. Information is current as of the date presented.Slides may not be reproduced without the express permission of Cohen & Company, Ltd.January 11, 2018

webinar - tax reform 01 11 18 final - cohen & company€¦ · individual tax reform agenda ›...

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