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New Legislation - BusinessChapter 2 pp. 23-58
2018 National IncomeTAX Workbook™
Property shall betreated as
If such property hasa class life in years of
Years property maybe used for QBI
3-year property 4 or less 105-year property More than 4 but less than
1010
7-year property 10 or more but less than 16 10
10-year property 16 or more but less than 20 10
15-year property 20 or more but less than 25 15
20-year property 25 or more 20
QBI “Stuff” Allowable Years
p. 24
Corporate Tax Changes
Tax years beginning after 12/31/2017▪ Flat 21% tax rate▪ Limit on accumulated earnings
credit $250,000 ($150,000 if any member a service corp.)
p. 26
Corporate AMT
Minimum tax credit▪ 50% of MTC in excess of MTC offsetting
regular tax is refundable (2018-2020)▪ 100% of excess refundable in 2021▪ If short tax year, pro-rate based on # of days
Alternative Minimum tax▪ Repealed for tax years beg’g after 2017
Employer Credit pp. 24-25
Paid Family and Medical Leave
Wages paid > 12/31/17 and < 1/1/20 General business credit = 12.5% wages if
wages 50% of EE’s wage▪ Plus .25% for each % paid > 50% (max 25%)
Max 12 weeks per year per EE Credit cannot exceed hourly rate x hours of
leave
Employer Credit p. 25
Paid Family and Medical Leave
Eligible employer▪ Has written policy ▪ Allows FT EEs ≥ 2 weeks/year (PT %)▪ Require payment of ≥ 50% regular pay▪ Must provide protections under the Family and
Medical Leave Act of 1993▪ Leave paid for by state/local or required by
state/local law not included
Employer Credit p. 25
Paid Family and Medical Leave
Qualifying Employee▪ Employed 1 year or more and▪ For preceding year comp not > 60% HCE
($120,000 HCE threshold in 2018)
Employer Credit p. 25
Paid Family and Medical Leave
Family and medical leave is leave for:▪ Birth and care of son/daughter▪ Placement of child – adoption, foster care▪ Care of spouse, child, parent w/health issue ▪ EE’s serious health condition▪ Qualifying exigency re: active duty of spouse,
child, parent▪ Care for covered service member spouse,
child, parent or next of kin to EE
Employer Credit p. 25
Paid Family and Medical Leave
Cannot be payment for vacation, personal or other medical or sick leave Can elect to not get credit Wage deduction reduced by credit taken
p. 26
Employee Achievement Awards
Awards paid after 12/31/2017 Prohibits deduction of non-tangible as
employee achievement award No change to § 74(c) for EE exclusion
pp. 26-27
Contributions to Capital §118
Contributions made after 12/22/17 Contributions to capital ≠ corporate income Do not include:▪ Contribution in aid of construction or any
contribution as current/potential customer
▪ Contribution by govt entity or civic group
p. 27
$1M Compensation Limit
Additions to covered EE (Yrs beg’g > 2017) ▪ Principal executive officer or principal
financial officer at any time during year▪ 3 highest comp’d EE’s on SEC proxy stmt▪ Covered EE > 2016, always covered EE
Expanded to all domestic publicly traded Eliminates exceptions for commission &
performance based comp
Certain Fines and Penalties p. 28Paid/Incurred after 12/22/17
No deduction if at direction of government▪ If government is complainant/investigator
Exceptions (will be identified in govt reporting):▪ Restitution▪ To come into compliance w/any law▪ Reimbursements for costs▪ Restitution for failure to pay tax▪ Amounts paid/incurred as taxes due
pp. 28-29
Business Interest Deduction
Deduction limited to the sum of:1. Business interest income2. 30% of adjusted taxable income (not < 0)3. Floor plan financing interest for the year
N/A to small business ($25M gross receipts test)Ex. 2.1 $20,000 (business interest income) +
$30,000 (30% of adjusted taxable income) $70,000 disallowed carries over indefinitely
p. 29
Business Interest Deduction
Adjusted Taxable Income = Taxable Income w/out:1. Items not allocable to T or B2. Business interest exp/interest income3. NOL deduction4. § 199A deduction5. Depreciation, amortization, depletion (< 2022)6. Other adjustments IRS may specify
Bonus Depreciation pp. 33-34Property Placed Into Service After 9/27/17
Aircraft & long production period property %’s decrease one year later, ending with 20% in 2027
General (also for plants bearing fruits and nuts)After 9/27/17 & Before 1/1/23 100%After 12/31/22 & Before 1/1/24 (2023) 80%After 12/31/23 & Before 1/1/25 (2024) 60%After 12/31/24 & Before 1/1/26 (2025) 40%After 12/31/25 & Before 1/1/27 (2026) 20%
Merrill covers this in Chapter 13!
pp. 34-35
Certain Farm Property
Placed in service > 2017 & yrs ending > 2017 Recovery period 7 → 5 years if used in farm’g
[§263A(e)(4)] if original use began with TP▪ Except grain bin, cotton ginning, fence or
other land improvement Repeals required use of 150% DB unless:
▪ 15 or 20-year property▪ TP elects 150% DB
Barry will cover this in Agriculture Section
Recovery Period – Real PropertyPlaced in Service > 2017 p. 36
Qualified improvement property = improvem’t to nonresidential bldg. interior placed in service after date bldg. first placed in service
Exceptions:▪ Enlargement of the building▪ Any elevator or escalator▪ Building’s internal structural framework
Recovery Period – Real Propertyp. 36
Qualified improvement property▪ Committee Reports: 15 year, bonus dep. O.K.▪ TCJA language: 39 year, no bonus▪ Technical correction expected
§179: “Qualified improvement property” replaces qualified leasehold, restaurant, and retail
Recovery Period – Real Propertypp. 36-37
Real property T or B elect out of bus int limitation → ADS for real property and qualified improvement property
Farms elect out of bus int limitation ADS on any property with recovery period of ≥ 10 years (years beg’g > 2017)
ADS recovery period – residential rental: 40 to 30 years
Modification of NOL p. 37NOLs Arising in Years Beg’g > 12/31/2017
NOL deduction limited to the lesser of:▪ Aggregate of NOL c/o’s & c/b’s to year or▪ 80% of taxable income (w/o NOL deduction)
Ex. 2.4 $95,000 NOL in 2018 carried to 2019 $100,000 Tax Inc in 2019 NOL deduction limited to $80,000
Modification of NOL p. 37
2-year carryback repealed Replaced with indefinite carryforward Farm loss may be carried back 2 years
▪ Lesser of loss with farming items only or NOL▪ May elect to forego carryback
Property & casualty insurance companies not subject to 80% limit and may carryback 2 years
Note: 3 year c/b for hurr. disaster NOL remains
Research & Experimental ExpendituresAmounts Paid/Incurred > 2021 p. 38
Capitalize & amortize ratably over 5 years Research outside US, 15 year amortization Begins at midpoint of year paid/incurred Specified research or experimental exp
▪ Includes software development▪ Does not include land or property but does
include depreciation & depletion▪ Does not include exploration expenses
Research & Experimental ExpendituresAmounts Paid/Incurred > 2021 p. 38
Abandon, retire or dispose of property used? → continue amortization
Application of new rules = change in acctg.▪ Treated as initiated by IRS ▪ Cut-off method, no 481(a) adjustment
Section 179 Expensing p. 38Property Placed in Service > 2017
$1M limit $2.5M phaseout threshold
SUVs: $25,000/vehicle limit – tax years beginning after 2018 (to be indexed)
Add: certain depreciable tangible personal property used to furnish lodging
Add: qualified real property as eligible
Section 179 Expensing pp. 38-39Property Placed in Service > 2017
Qualified real property eligible for §179: improvemts to nonresidential real placed in service after bldg. placed in service▪ Roofs▪ HVAC property ▪ Fire protection and alarm systems▪ Security systems(4 of the 8 bldg. systems in capitalization regs)
BASIS REPORTING REQUIRED FOR 2018 Handout
new note line in Part II:
Note: If you report a loss, receive a distribution, dispose of stock, or receive a loan repayment from an S corporation, you must check the box in column (e) on line 28 and attach the required basis computation. If you report a loss from an at-risk activity for which any amount is not at risk, you must check the box in column (f) on line 28 and attach Form 6198 (see instructions).
Handout
At the Individual 1040 Level
IF ANY Reported a loss from
Schedule K-1 Received a distribution Disposed of S Corp stock
or interest in the Partnership
Received a loan repayment from the S Corp
MUST BE ATTACHED
Handout
Do you have basis for ALL yours?Handout
PRACTICE UNITS Handout
PRACTICE UNITS Handout
Summary
Soft Letter Draft Instructions Section L of
Schedule K-1 (1065)
p. 39Domestic Production Activities Deduction
Repealed▪ All TPs for years beginning after 2017
§199A – Qualified Business Income Ded.2018-2025 p. 39
Deduction = 20% QBI limited by:▪ 20% of taxable income w/out net capital gain▪ W-2 wage limit/Qualified Property▪ Specified Service Trade or Business limit
(SSTB)
§199A – Qualified Business Income Ded.W-2 Wage Limit pp. 39-40
Applies if taxable income > threshold $▪ $157,500 ($315,000 if MFJ)▪ Limit phase-in threshold plus $50,000
($100,000 MFJ)
Wage Limit = Greater of:▪ 50% x W-2 wages from QB or▪ 25% x W-2 wages from QB + 2.5% x
unadjusted basis of all qualified property
§199A – Qualified Business Income Ded.Qualified Business Income (QBI) p. 42
Qualified items of income, gain, deduction & loss effectively connected to bus in US
Does not include: (remember Entity Level)▪ Capital gain/loss, dividend income▪ Interest income (unless allocable to T or B)▪ Certain items under §954(c)▪ Annuity not received in connection with Tor B▪ Deduction or loss relating to any of above
§199A – Qualified Business Income Ded.Qualified Business Income (QBI) pp. 42-43
Does not include amounts paid to TP by a qualified T or B:▪ Guaranteed or §707(a) paymts from PS▪ Wages from S corp
Partnerships are not required to make Guaranteed Payments
§199A – Qualified Business Income Ded.Qualified Business Income (QBI) p. 43
Net QBI loss carries to next year Deduction allowed in subsequent year
reduced by 20% of c/o qualified bus. loss
§199A – Qualified Business Income Ded.Qualified Trade or Business p. 43
Qualified Tor B = any Tor B other than SSTB or T or B as an EE
SSTB = Tor B in §1202(e)(3)(A) other than engineering & architecture▪ Health, law, accounting, actuarial science,
performing arts, consulting, athletics, financial services, brokerage services, if principal asset = EE skill
§199A – Qualified Business Income Ded.Specified Service Business p. 44
If taxable income < threshold SSTB = qualified
If taxable income in phasein range:▪ Use % x QBI & wages from SSTB▪ % = 100% less ratio of TI > threshold
divided by phasein (50,000 or 100,000)Range: 157,500→207,500 MFJ 315,000→415,000
If taxable income > 207,500 (415,000): QBI does not include SSTB
§199A – Qualified Business Income Ded.p. 44
Deduction does not reduce AGI Deduction only for income tax purposes▪ Does NOT reduce SE tax
For AMT, computed without AMT adjustments
§199A – Qualified Business Income Ded.p. 45
Partnerships and S Corporations Deduction at the PN and SH level Use allocable share of income/loss,
wages, unadjusted basis of property
Trusts and Estates Eligible for QBI deduction Rules to allocate wages & QP similar to
those of §199(d)(1)(B)(i) (DPAD rules)
§199A – Qualified Business Income Ded.p. 47
Accuracy-related penalty applies to the §199A deduction TP can claim deduction for 20% of
aggregate $ of qualified REIT dividends▪ Without capital gain div. or qualified div.
TP can claim deduction for 20% of qualified publicly traded PS income▪ Allocated $ + ordinary gain (sale of PTP int.)
p. 48Other TCJA Changes
DRD reduced – tax year beg’g after 2017 70%→50%, 80%→65%, To “offset” reduction in tax rateExpenses of Costs of Replanting Citrus Costs paid/incurred after 12/22/17 Modifies rule re: deduction by other than TPWine, Beer, Spirits Production Period Exclude aging period for UNICAP purpose
Covered in Business Issues Section
p. 49Small Business Accounting Method
Expands eligibility for cash method Average GR for prior 3-yr-period ≤ $25M C corps & farms w/C PN qualify if ≤ $25MEases requirements for maintain’g inventory $25M gross receipts test applied Treat as non-incidental materials &
supplies or treat as in TP’s books
This Section is Covered by Merrill
Business Expense Changes p. 50
Paid/Incurred After 12/31/2017
Entertainment – no deduction for1. Entertainment, amusement, recreation2. Membership dues to club organized for
business, pleasure, recreation, social3. Facility or portion thereof used in
connection with #1 or #2
Business Expense Changes p. 50Paid/Incurred After 12/31/2017
Deduction remains ▪ To extent amount taxed to EE▪ Substantiated expense in connection
with services for another (reimbursed)▪ Recreational, social or similar primarily
for EE benefit▪ If related to S/H, EE, Director meetings
Business Expense Changes p. 50
Paid/Incurred After 12/31/2017
Transportation Expenses No deduction for costs of any qualified
transportation fringe benefit to EEs Except as necessary to ensure safety, no
deduction for costs to provide or reimbursement for commuting
Business Expense ChangesFood and Beverage pp. 50-51
Can deduct 50% of food/beverage in Trade or Business (such as when EEs traveling)
12/31/17-12/31/2025: 50% to apply to cost of de minimus fringe eating facility & cost of meals for convenience of ER
After 12/31/2025: No deduction for de minimus fringe facility/convenience meals
Allowable Reimbursing Plan p. 50
“ certain substantiated expenses paid or incurred by the taxpayer in connection with the performance of services for another person under a reimbursement or other expense allowance arrangement; “
Listed Property p. 51
Vehicle into service > 2017, yr ended > 2017 Auto with no bonus depreciation▪ Year 1: $10,000▪ Year 2: $16,000▪ Year 3: $ 9,600▪ Year 4 +: $ 5,760/year
W/bonus dep: $18,000 for Year 1Computer/peripherals no longer listed prop.
Year of Inclusion pp. 51-52
Accrual basis TP With AFS (applicable financial statement),
recognize income no later than tax year in which recognized in the AFS
Without AFS, continue to apply all events test unless deferral or exclusion allowed
AFS definition – p. 52
Year of Inclusion p. 52
Codifies deferral method in Rev Proc 2004-34▪ Accrual TP can elect deferral of advanced
payments to end of tax year following year of receipt if also deferred in financial statement
▪ If advance payment for mixed items, may allocate as done for financial statement
▪ If TP ceases to exist, balance taxable Application of these rules = change in acctg▪ Initiated by IRS, consent (OID: 6-yr spread)
Limit on Losses pp. 52-53Tax Years 2018 to 2025
Excess business loss disallowed Excess business loss = ▪ Total all business deductions over sum:
1. Gross income/gain of all T or Bs2. $250,000 ($500,000 MFJ)
Passive activity limits applied first Excess is NOL c/o to subsequent year Limit applied at PN or SH level
EBL Example NIB
A single taxpayer has gross income of $200,000 and deductions of $500,000 or a $300,000 loss on his Schedule C.
Taxpayer has an excess business loss of $50,000.
Therefore, in addition to offsetting all of the $200,000 in gross business income, the maximum business loss Joel can claim on his 2018 return is $250,000.His $(50)K EBL carryover will go onto 2019 return.
$200K-500K$(300)K
$500
$200
+$250
- 450$ (50)
EBL Example NIB
Now let’s say the taxpayer is married. He has gross income of $200,000 and deductions of $500,000 or a $(300,000) loss on his Schedule C and his wife has no business income. Their actual loss on the return will be $300K
$700$200+ 500
$-700-0-
EBL Example NIB
Same married TP w/Sch C numbers:
His wife has W-2 income of $150,000 and investment income of $50,000.Same potential business loss allowed as before:
How much is their allowed business loss this year?
The entire business loss of $300,000 is allowed on their joint return, and the wife’s income can be offset as well.
$200K-500K$(300)K
$700$200+ 500
$-700-0-
EBL Example NIB
MFJ: Taxpayer Sch C has gross income of $200,000 and deductions of $500,000, or a $300,000 loss. Spouse has a Sch C with gross income of $250,000 and deductions of $600,000, or a $350,000 loss.
$200-500$300
$250-600$350$950 (200+250+500)
$500 hus sch C+ 600 wife sch C
-1,100$150 2018 EBL treated as a 2019 NOL
S Corp Conversion to C Corp p. 53Effective 12/22/17
Eligible terminated S corp is C corp that1. Is an S corp before 12/22/2017,2. Revokes S status during 2-yr period
beginning 12/22/2017, and3. SHs on date of revocation same as on
12/22/2017 with same allocable share Any 481(a) required spread over 6 years Distributions after PTTP allocated between
AAA and accumulated earnings (not AE first)
Covered in Business Entity Issues Section
Unrelated Business Income pp. 53-54Tax Years Beg’g After 2017
UBTI must be calculated for each unelated trade or business separately
Deduction from one T or B may not be used to offset income from another
NOL deduction allowed only against income of T or B for which loss arose
UBTI increased by disallowed fringe benefit expenses
PS Provisions pp. 54-55Tax Years Beg’g After 2017
PN basis limitation applies to foreign taxes and charitable contributions▪ If FMV of contribution > asset basis, excess
not subject to basis limitation PS technical termination rule repealed
(rule re: ≥ 50% ownership change in 12 mos.)▪ Termination on cessation of business or
reduction to only one owner remains
PS Substantial Built-in Loss p. 55Transfer of PS Interests After 2017
Substantial BIL exists if seller would be allocated a net loss > $250,000 if all PS assets sold immediately after transfer
A substantial BIL requires asset basis adjustment even w/o a §754 election
New law requires adjustment to buyer’s basis in PS assets for the BIL
PS Substantial Built-in Loss p. 55Transfer of PS Interests After 2017
Ex 2.14 ABC Partnership, No §754 election Asset X $1M BIG Asset Y $900,000 BIL PS agreemt: X gain to A, all else shared equally PS: Net BIG $100,000 C sells interest to D for $33,333 If assets sold, C allocated ($300,000) As loss is “substantial” basis of PS assets
adjusted as to D
p. 55-57
Other TCJA Changes
Like-Kind Exchanges after 12/31/2017▪ Nonrecognition only for real property
not held primarily for sale
PS profits interest for performance of investment services – Yrs beg’g > 2017▪ CG passed to fund managers not LTCG
unless held for 3 years by PS (ordinary)▪ Rule applies regardless of §83 election
Self-Created Property p. 57
Dispositions after 2017
Additional exclusions from capital assets under §1221(a)(3):▪ A patent, inventory, model, or design
(whether or not patented)▪ A secret formula/process held either by
TP who created it or TP with substantial transferred basis from creator of asset
Sale of such assets not capital gain/loss
p. 57Other TCJA Changes
Electing Small Business Trust: A nonresident alien can be beneficiary
Excise Tax pp. 57-58Exempt Org Executive Compensation
Tax years beginning after 12/31/2017 21% excise tax on remuneration to
covered EE in excess of $1M plus excess parachute payment
Applicable tax-exempt: §501(a) Covered EE: One of highest 5 paid or
covered EE for any year after 2016
Questions?
69
