PowerPoint PresentationToday’s Discussion Topics
• Individual Tax Provisions
• General Business Provisions
• Entity Specific Provisions
3. Legislative Outlook
Tax Cuts and Jobs Act Part 1: Individual Tax Provisions
Individual Tax - Standard Ded & Exemptions
• Standard Deduction approx.
Household)
blind
under 17 to $2,000 per child under
17.
(MFJ); $200,000 for all others.
• $1,400 per child is now refundable
• Qualifying child 17 or over and a
dependent is now eligible for $500
credit, subject to phase-outs above
Individual Tax Reforms – Itemized Deductions
• 3% limitation on total itemized
deductions for high incomers – GONE!
• Medical expenses (unreimbursed) still
7.5% from 10%.
property taxes) – limited to $10,000
• Mortgage Interest – still deductible
indebtedness no longer deductible
• Charitable Contributions still
goes from 50% to 60% of AGI)
• Personal and casualty losses GONE,
unless such loss is due to a
federally declared disaster by the
President
• Gambling losses – STAY
No Deduction for contributions to universities for the RIGHT to purchase tickets…
Individual Tax Reforms – Other Provisions
• INDIVIDUAL AMT IS STILL HERE! Bah
Humbug. But, exemptions are higher
and phase-outs are higher
investors with realized gains
in 2019! No penalty for not having health
insurance beginning in 2019
Tax Cuts and Jobs Act Part 2: General Business Provisions
TCJA – General Business Provisions
• Reasonable Compensation
• Phase-out threshold at $2.07M of purchased assets
TCJA – IRC Section 179
• Qualifying Property includes:
• improvements to nonresidential real property
Effective for tax years beginning after 2017
TCJA – IRC Section 179
• Included Qualified Improvement property
• Used property
TCJA – Bonus Depreciation
• Separate designations and treatment of leasehold, restaurant, or retail property
• ADS recovery of 40 years
New Law
For assets placed in service after 2017
TCJA – Real Property
Max Depreciation Limits
• 2nd year: $16,000
• 3rd year: $9,600
TCJA – Luxury Automobiles
• Interest paid or accrued by a business is generally deductible
New Law
• Net interest expense in excess of 30% of the company’s adjusted taxable income is disallowed
• Taxpayer exempt if the 3 year average annual gross receipts are less than $25M
• Exemption for floorplan financing interest
Years starting after 2017
TCJA – Interest Expense Limitation
Net Interest Expense 2,235,947.00 3,109,170.00 4,126,984.00
Taxable Income 404,009.00 (104,204.00) -
Adjusted Taxable Income 7,189,057.00 3,653,604.00 5,013,534.00
30% Limitation 2,156,717.10 1,096,081.20 1,504,060.20
Interest Expense Limitation 79,229.90$ 2,013,088.80$ 2,622,923.80$
Changes
• Treated as a Net Operating Loss carryover
For tax years after 2017 and before 2026
TCJA – Non-corporate Business Losses
• 20 year carryforward limit
• No carryback
• Unlimited carryforward
TCJA – Net Operating Losses
TCJA – DPAD
TCJA – Like-Kind Exchanges
• Amount can be reasonably determined
New Law
• No later than the tax year that it is recognized on the financial statement
• Exception for long-term contracts
Years starting after 2017
Old Law
• C corporations or partnerships with a C corporation partner cannot use cash method
• Exception if annual receipts are less than $5M
• Taxpayers with Inventory must use accrual method unless they have gross receipts of under $1M
New Law
• Cash method allowed for taxpayers with less than $25M of gross receipts
• If a taxpayer meets the income limit, they may treat inventory like deductible materials or supplies, or conform to financial accounting treatment
Years starting after 2017
TCJA – Cash Method Accounting
• Deduct amounts incurred or paid in current year
• Elect to capitalize and deduct over life of research if 5 years or less, or elect 10 years
New Law
• Full deduction no longer allowed
• Must be capitalized and amortized over 5 years domestic, or 15 years if outside the U.S.
Amounts paid or incurred in year starting after 2021
TCJA – Research and Experimental Expense
Old Law
• Entertainment, food, and beverage expenses related to business are 50% deductible
• Certain employee fringe benefits are deductible by employer and excluded from employee’s gross income
New Law
• Transportation fringe disallowed
• Starting after 2025, employer’s deduction for meals on its business premises disallowed
Amounts paid or incurred after 2017
TCJA – Fringe Benefit Deduction
New Law
• Claim a general business credit of 12.5% of the amount of wages paid to certain employees if rate is at least 50% of normal wages
• Credit is increased for each percentage point by which the payment exceeds 50%
For years between 2017 and 2020
TCJA – Employer-Paid Family and Medical Leave
Old Law
• Entertainment, food, and beverage expenses related to business are 50% deductible
• Certain employee fringe benefits are deductible by employer and excluded from employee’s gross income
New Law
• Transportation fringe disallowed
• Starting after 2025, employer’s deduction for meals on its business premises disallowed
Amounts paid or incurred after 2017
TCJA – Fringe Benefit Deduction
Tax Cuts and Jobs Act Part 3: Key Entity-Specific Tax Provisions
Item New Law Previous Law Effective Date
Tax Rate Change • Flat rate of 21% • Graduated tax rates, with top rate of
35% if taxable income exceeded $10M
Tax years starting
corporation, a 65% deduction is allowed
• If not, the deduction is 50%
• Affiliated group members receive a 100%
deduction
another corporation, an 80% deduction
was allowed
• Affiliated group members receive a
100% deduction
• Corporate AMT is repealed • AMT imposed if its tentative minimum
tax exceeded its regular tax
Tax years starting
1. any contribution in aid of construction
or any other contribution as a
customer/potential customer
entity or civic group
• A contribution to capital did not include
any contribution in aid of construction or
any other contribution from an
established or potential customer
Conversion to C Corporation
terminated S corporation’, the accumulated
adjustments account is allocated to such
distribution, and the distribution is
chargeable to E&P on a pro-rata basis
• Eligible terminated S corporations are C
corporations that:
12/22/17;
12/22/17; and
the revocation date
corporation to its shareholders during
the post-termination transition period
terminates) are tax-free to shareholders
and reduce the adjusted basis of the
stock
12/22/17
beneficiaries
corporation
Technical Terminations • Repealed • Partnership considered to terminate if
within a 12 month period, there was a
sale/exchange of 50% or more of a
partnership’s capital and profits
interests
Substantial Built-in Loss Rule • Substantial built in loss rules expanded –
exists now if the recipient of the interest
would be allocated a net loss in excess of
$250K upon hypothetical disposition of all of
its assets for FMV immediately after the
transfer of interest
of its property if the property had a
‘substantial built in loss’ of more than
$250K
taxes taken into account in determining the
basis limitation on partner losses
• Exception – if charitable contribution of
property with FMV larger than its adjusted
basis
partner’s share of partnership
charitable contributions and foreign
limitation on partner losses
Excise Tax on Excess
paid executives
1. Compensation in excess of $1M paid to
a covered employee;
a covered employee
income of certain private colleges
• Must have 500 students or more
• 250 or more of those students must be in the
US
of at least $500K per student
• N/A Tax years starting
another trade or business
would aggregate income from all of its
unrelated trades/businesses, and
Case Overview
• Challenges South Dakota’s application of sales tax to internet retailers
• 1992’s Quill Corp vs North Dakota – physical presence
What is Nexus?
• Nexus is the concept of sufficient presence in a state, before that state may exercise its taxing jurisdiction over a business
• Factors affecting ‘sufficient presence’:
Due Process and Commerce Clause
• Historically, the Supreme Court has considered nexus in the context of the Due Process and the Commerce Clause of the US Constitution:
• Due Process Clause
• Quill Corp. vs. North Dakota – 1992
• Quill Corp. was incorporated in Delaware – • No physical location in North Dakota
• No employees located in North Dakota
• Quill sold office equipment and stationery in North Dakota using catalogs, flyers, and telephone calls
• Deliveries were made by common carrier from out-of-state locations
• North Dakota attempted to require Quill to collect and pay use tax on sales shipped into the state
• North Dakota argued that under the Due Process Clause, Quill established a presence in the state, because it had 5 floppy discs holding Quill’s software located within the state
• The court held that a company may have minimum contacts (i.e., in this case, the floppy discs) required by the Due Process Clause, and still fall short of substantial nexus required by the Commerce Clause
“Kill Quill”
• After the Quill case, some states began coming up with creative ways to try to get around the physical presence standard, such as –
• Clickthrough Nexus
• Marketplace Nexus
• Cookie Nexus
• Use Tax Notification
The Wayfair Case
• In 2016, South Dakota enacted S.B. 106, which stated that sellers who do not have physical presence will have nexus if they meet either of the following thresholds in the previous or current calendar year:
• Gross revenue from delivery of products or services into South Dakota exceeding $100,000
• Sale of goods for delivery into South Dakota in 200 or more separate transactions
The Wayfair Case
• South Dakota then filed a lawsuit in state court stating that the law was valid and applicable to certain online retailers
• Wayfair, Inc., Systemax, Inc., and Overstock, Inc. sought summary judgement that the law was unconstitutional under the Quill case
• Trial Court granted summary judgement for the online retailers, and the State Supreme Court affirmed this on the grounds that Quill was the controlling precedent
• South Dakota then filed a petition to the US Supreme Court with the following question –
• Should this Court abrogate Quill’s sales-tax-only, physical presence requirement?
The Wayfair Case
• The Supreme Court held that Quill’s physical presence rule is unsound and incorrect, thus overruling Quill vs. North Dakota
• The reasoning –
• Physical presence is not a necessary interpretation of the requirement of substantial nexus
• It creates rather than resolves market distortions
• It is arbitrary
The Wayfair Case
• Physical Presence is outdated due to modern technology and the way business is done today
• At the time of Quill, the court could not have envisioned a world where the largest retailer is a remote seller
The Wayfair Case
• What did the court NOT rule?
• The court did NOT rule that South Dakota’s economic nexus standard is constitutional
• It simply said that physical presence is no longer the bright line rule for establishing nexus – states can determine other ways to establish nexus
Economic Nexus Across the States
State Threshold Effective Date
Alabama $250,000 or more in sales in previous year and
one or more nexus creating activities described in
§40-23-68, Code of Alabama
retail sales during the previous year
December 1, 2018
than 200 separate transactions in the previous or
current calendar year
January 1, 2019
proceeds, or makes more than 200 separate
transactions in the previous or current calendar
year
beginning after 2017
makes more than 200 separate transactions in
previous or current calendar year
January 1, 2019
sales, or makes 200 or more separate
transactions over a 12 month period
October 1, 2018
State Threshold Effective Date
transactions in the previous calendar year
Indiana will provide update on effective date
Kentucky $100,000/year in gross receipts from sales, or
makes more than 200 separate transactions in
the previous or current calendar year
July 1, 2018
current calendar year
Massachusetts $500,000 in sales over the preceding calendar
year, and 100 or more transactions in the
preceding calendar year
October 1, 2017
separate transactions in the previous calendar
year or the current calendar year
October 1, 2017
and adopted a marketplace sales tax law
October 1, 2018
State Threshold Effective Date
referrer who had at least $10,000 in aggregate
Oklahoma sales in the preceding 12 month
calendar period
previous 12-month period
April 1, 2018
Rhode Island Sales of $100,000 or more, or exceeded 200
separate transactions in the state in a calendar
year
August 17, 2017
South Dakota Sales of $100,000, or 200 or more transactions in
the state in a calendar year
State Circuit Court injunction is still in place.
Case currently on remand.
previous 12 months
state-court lawsuit challenging the regulation.
Utah Sales of $100,000 or more in the state, or at least
200 individual sales transactions into the state in
the prior 12 months
• Will states attempt to retroactively apply the new ruling?
• Most likely not
• Massive increase to administrative/compliance burden
• Movement to undermine Wayfair
• Overstock, for example, has already decided to pay sales and use tax everywhere
• Taxpayers need to evaluate exposure
• Taxpayers with an increased need for resale certificates
The Legislative Outlook
• IRS Reform – House • 3 Bills
• Taxpayer First Act of 2018
• Protecting Taxpayers Act
• Tax Reform 2.0 – Senate • Passed House late September
• 3 Bills • The Protecting Family and Small Business Tax Cuts Act of 2018
• The Family Savings Act of 2018
• American Innovation Act
Legislative Outlook - Congress
• Final Regulations
https://www.irs.gov/pub/irs-utl/2018- 2019_pgp_initial.pdf