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DISCLAIMER
The material appearing in this presentation
is for informational purposes only and
should not be construed as advice of any
kind, including, without limitation, legal,
accounting, or investment advice.
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Today’s Outline
• General Introduction
• Individual Update
• Business Update
• Closing Comments
• Questions
Reg Baker, CPA PFSE-mail: [email protected] Phone: (808) 753-6026
• Over 30 years experience as a SMB business advisor• SBA’s National Board of Directors for Regulatory Fairness & Chair of Region IX• State of Hawaii Small Business Regulatory Review Board member• Host of the weekly Business in Hawaii with Reg Baker show (120+ broadcasts)• Co-chair of Chambers SBE & ED Committee & Founder of the FocusOn Series• Former two term Chair of SBA’s Pacific Advisory Council• SBA Financial Advocate of the year for State of Hawaii in 1992 and 2017• CPA Credentials – Two terms as Chair of HSCPA, one term as Chair of NSCPA and
two terms on the AICPA Advisory Council. One of 13 CPA’s that wrote the PFS exam
• Nationally recognized SMB expert (quoted in Hawaii Business Magazine, PBN, Star Advertiser, Fox News, Radio and TV)
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Tax Reform Background
• First true reform in over 30 years
• Bill is over 500 pages with lots of margin notes
• Expecting 2,000+ pages of rules and regulations and another few thousand pages of interpretations. Plus instructions and forms
• Take years to fully understand and implement. Just getting started
• Tax Reform 2018 – all temporary. Reverts back on Jan 1, 2026
• Future legislation
• State conformity Issues
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Reminder about due dates
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• Form 1065(Partnership)
• Form 1120S(S corporation)
March15
• Form 1040(Individual)
• FinCEN Form 114(Foreign bank reporting)
April17
• Form 1120(C corporation)
April17
• Form 1041(Trust and estate)
April17(Extend until
Sept. 17)(Extend untilOct. 15)
(Extend untilOct. 15)
(Extend untilOct. 1)
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The basics for Individuals
• Still seven tax brackets
– 10%, 12%, 22%, 24%, 32%, 35%, 37%
• No more dependent exemption
• Higher child tax credit ($2,000)
– New $500 non-child dependent credit
• Increase in standard deduction (70% use)
• Individual AMT not repealed
– But exemption amounts have increased
39.6%
37.0%
35.0%
35.0%
33.0%
32.0%
24.0%
28.0%
22.0%25.0%
15.0% 12.0%
10.0% 10.0%$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,0002017
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
2018
Individual Income Tax RatesComparison
33.00%
24.00%28.00%
22.00%25.00%
15.00% 12.00%
10.00% 10.00%$-
$50,000
$100,000
$150,000
$200,000
$250,0002017
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
2018
Individual Income Tax RatesComparison - $250,000 & Lower
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Dividend and capital gains rates unchanged
• The top tax bracket for qualified dividendsand capital gains is 20%(23.8% if the NII tax applies – MFJ $250k).
Here’s the breakdown:0% for MFJ taxpayers with < $77.2k taxable
income
15% for MFJ taxpayers with between $77.2k and $479k taxable
income
20% for MFJ taxpayers with taxable income greater than $479k
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Itemized deductions changes
• Repeal of the overall limitation on itemized deductions
• Medical deduction threshold is 7.5% for 2017 & 2018
– Reverts to 10% starting in 2019
• Mortgage interest limited to $750k of debt
– Debt prior to 12/15/17 is grandfathered
• Home equity interest no longer deductible
• State and local tax deduction is limited to $10k ($5k if MFS)
• Misc. deductions subject to 2% threshold no longer deductible
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Misc. itemized deductions subject to 2% AGI
• Unreimbursed employee expenses
• Tax prep fees
• Hobby expenses
• Investment fees/expenses
• Legal fees related to producing income
• Safe deposit fee
• Gambling losses (in excess of winnings)
…are no longer deductible
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20% pass-through deduction – Section 199A
• 20% of qualified business income
• Qualified business income definitions
– Qualified trade/business income
• Not a specified trade/business
– Trade/business involving performance of services
– Does not include investment income
– Does not include reasonable compensation paid from S corporation or guaranteed payments paid to a partner
– Phase-out limitation
IRC § 199AEligible Taxpayers
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
TYPES OF
TAXPAYERSTHRESHOLD AMOUNT
Married Persons $ 315,000
All others (not C-corps) $ 157,500
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IRC § 199AEligible Taxpayers
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
• Owners of:
– REITs & PTPs
– Sole proprietorships (Schedule C)
– Sole owners (or TIC owners) of rental real estate (Schedule E)
– S-Corporation owners (Form 1120S)
– Partnership owners (Form 1065)
ALL QUALIFY BUT THE COMPUTATION DIFFERS
Is it a Service Business per §§1202(e)(3)(A),475(c)(2), or475(e)(2)?
Is taxable income over
the threshold?315/157.5
Is taxable income over the
threshold?315/157.5
Deduction = QBI x 20%
Deduction =QBI x 20%
Over full Phase – in? 415/207.5
Is taxable income over the full phase-in?
415/207.5Deduction Reduced
Deduction equals lesser of:
· QBI x 20% or
· The greater of:- W-2 wages x 50%- W-2 wages x 25% + 2.5% of unadjusted basis
No No
NoNo
No
Yes
Yes Yes
NoDeduction
Deduction Reduced
YesYes
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
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Affordable Care Act impact
• Penalty to maintain insurance coverage (individual mandate) is repealed for 2019 and forward
• HOWEVER, still in effect for 2017 and 2018
• 2017 penalty:
• Higher of 2.5% of yearly household income, or
• $695 per person ($347.50 per child under 18)
• 3.8% NII Tax and .9% MC Tax
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Alternative minimum tax (AMT) changes
• Alternative tax system that parallels the regular federal tax(with different rates and rules for deductions)
• Increase in exemption amount
• Due to limit on state/local tax deduction and repeal of miscellaneous deductions, impact should be less
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Changes to retirement planning
• Ability to recharacterize a Roth conversion to a traditional IRA is removed after 2017
• Have until October 15, 2018 to recharacterize a 2017 conversion
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Estate and gift taxes changes
• 2018 estate tax exemption: $11.2 million
• 2018 gift tax annual exclusion: $15,000
• Estate planning is more than minimizing estate taxes.
– Updating documents
– Repurposing insurance
– Asset protection
Estate & GST Taxes
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
$12,000,000
$10,000,000
$8,000,000
$6,000,000
$4,000,000
$2,000,000
$-
Estate Tax Exemption - Past & Projected
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Other individual changes to note
• Casualty losses: only from federally-declared disasters
• Alimony: deduction/inclusion repealed for divorces executed after 12/31/18
• Moving expenses deduction repealed
• Kiddie tax now at trusts/estate tax rates
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Charitable contribution changes
• AGI limitation increased to 60% for cash contributions (from 50%)
• Exception to contemporaneous written acknowledgement requirement is repealed (must be obtained now for any contribution of $250 or more)
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State and local tax issues
• Total deduction limit of $10k ($5k if MFS)
- Combination of income/sales and state/local property taxes
• Exceptions
- Tax imposed at entity level
- Property taxes for residential rental property/business property
• Prepayment of 2018 state income taxes in 2017
• Prepayment of 2018 real estate taxes in 2017
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Overview of business changes
• Corporate rate reduction to flat 21%
• Repeal of corporate AMT
• Special rules for pass-throughs (Sec. 199A)
• Expensing of assets
– increases to Sec.179 ($1 million and threshold $2.5 million)
– Bonus Depreciation
• Expanded accounting method exceptions for small businesses
• Changes to various fringe benefits including treatment of meals and entertainment paid by employer
• Limit on use of and carryback of NOL
• Limitation on interest expense deduction for non-small businesses (over $25 million receipts); limited exceptions
• Corporate shift from worldwide to territorial system – Cash 15.5% and non-cash 8%
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Corporate rate changes
• Flat rate of 21%
• Effective for years beginning after 12/31/17
• Personal service corporations taxed at same rate (no more surtax)
• Corporate AMT has been repealed
Current
Corporate Tax Rates
2018
• 21% flat rate
Personal Financial Planning SectionTax | Retirement | Estate | Risk Management | Investments
Tax Reform Delivered
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Effect on Accounting for Income Taxes under FASB ASC 740
• Effect on calculation of deferred tax liabilities/assets (due to change in rate)
• Additional complications related to fiscal year corporations
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Partnership change
• Repeal of technical termination provisions
- Greater than 50% ownership change (12 mos.)
• No longer an automatic termination
• No need to “close the books”
• No short year returns
• Effective for years after 12/31/17
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Depreciation changes• Additional first year/bonus depreciation- 100% for property
acquired after 9/27/17
• Phase down schedule for years after 2022
• Now allowed for new and used property
• Increases to Sec. 179 ($1M and threshold $2.5M)
• SUV limitation remains at $25,000
• Limits are indexed for inflation
• Allows residential rental property
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Accounting methods for small taxpayers
• Expanded availability of cash method
• Inventory tracking requirements
• Sec. 263A threshold raised
• Expanded availability of completed contract method
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Restrictions on interest deductions
• Deductible interest limited to
- Interest income for year plus
- 30% of taxable income plus
• Limitation at the taxpayer level
• Interest not deductible carries forward indefinitely
• Doesn’t apply to taxpayers that meet $25M gross receipts test
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Changes to fringe benefits/entertainment expense
• Repeal of business entertainment expenses
• Repeal of deduction for qualified transportation fringe benefits
• Repeal of exclusion for bicycle commuting reimbursement
• Repeal of exclusion for employee reimbursed moving expenses
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Net operating loss provisions
• No longer allowed to carryback NOLs
• Carried forward indefinitely
• 80% of taxable income may be reduced by NOL
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Other changes to note
• New limits on executive compensation deduction
• Changes for Sec. 1031 exchanges
• Expenses for employer operating eating facilities is now 50% (rather than fully deductible)
• Lobbying costs no longer deductible
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Planning for 2018 and forward
• Guidance needed on Sec. 199A (pass-through deduction)
– Definitions: qualified business income; qualified trade/business; small business
• Effect of corporate rate reduction to 21% on choice of entity
• Entertainment expenses
• Changes to fringe benefits and effect on employees
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International changes
• Move to a quasi-territorial system with a 100% dividends received deduction
• One-time tax on previously unrepatriated earnings – Cash 15.5% & 8% non-cash
• Can be payable over 8 years without interest (Yrs. 1-5: 8%, Y6: 15%, Y7: 20% and Y8: 25%)
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Questions
Thank youThank you© 2017 Association of International Certified Professional Accountants. All rights reserved.
