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MILES CPA REVIEW: REG

CONTENT UPDATES FOR Q1 2019

Summary of Updates:

- Tax Cut and Job Acts (TCJA Updates) tested from Q1 2019 onwards

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REG-1

REG 1.1 – Individual Income Tax Return = Form 1040

The Tax Cuts and Jobs Act of 2017 (TCJA) signed into law on Dec 22, 2017, by President Trump is the most sweeping tax legislation since the Tax Reform Act of 1986. Most of the changes per TCJA take effect from 2018 and expire in 2025. Key changes pursuant to TCJA applicable to Individuals: Form 1040 has been redesigned for 2018

The new design uses a “building block” approach. Form 1040, which many taxpayers can file by itself, is supplemented with new Schedules 1 through 6. These additional schedules will be used as needed to complete more complex tax returns

Form 1040A and Form 1040-EZ no longer available from 2018

Exemptions (both personal and dependency) have been suspended Not applicable from 2018 [vs. $4,050 per individual/dependent in 2017]

Standard deduction for all taxpayers has been significantly increased. E.g., Single - Increased to $12,000 in 2018 [vs. $6,350 in 2017] Married Filing Jointly (MFJ) - Increased to $24,000 in 2018 [vs. $12,700 in 2017]

Changes to itemized deductions (Schedule A). E.g., Overall itemized deductions are no longer limited if AGI (Adjusted Gross Income) is over a

certain limit Deduction of state and local income, sales, and property taxes is limited to a combined,

total deduction of $10,000 ($5,000 if MFS) Can no longer deduct job-related expenses or other miscellaneous itemized deductions

that were subject to the 2%-of-AGI floor

Qualified business income deduction now applicable @20% of qualified business income from qualified trade/business

Also, deduct 20% of qualified REIT (Real Estate Investment Trust) dividends and qualified PTP (Publicly Traded Partnerships) income

However, the domestic production activities deduction (DPAD) has been repealed with limited exceptions

Most tax rates have been reduced

New tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% from 2018 (vs. 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% in 2017)

Also, Alternative Minimum Tax (AMT) exemption amount has been increased

Increased child tax credit and additional child tax credit | New credit for other dependents For 2018, the maximum child tax credit has increased to $2,000 per qualifying child, of

which $1,400 can be claimed for the additional child tax credit However, Social security number (SSN) now required for child tax credit New non-refundable credit for other dependents (who cannot be claimed for the child tax

credit) @$500 per dependent

Annual inflation adjustment - Starting 2018, new indexing method using “chained CPI (Consumer Price Index)” to be used for indexing tax rate thresholds, standard deduction $, and other $ for inflation [vs. CPI used earlier]

Note: Chained CPI takes into account consumers’ preference for cheaper substitute goods during periods of inflation. Therefore, chained CPI will generally result in smaller annual increases to indexed $

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Key changes pursuant to TCJA for methods of tax accounting (cash / accrual): Cash basis of accounting -

Allowed for small businesses (including Partnerships and Corporations) that have average annual gross receipts of $25 MM or less during the preceding 3 years

Increased from earlier limit of:

$1 MM for Individuals, Partnerships, S-Corporation

$5 MM for C-Corporations and Partnerships with a C-Corporation partner

Accounting for inventories - Not required to use accrual method to calculate COGS and Inventory. May use either of the options:

Treat inventories as non-incidental materials and supplies, or Conform to the taxpayer’s financial accounting treatment of inventories

Accrual basis of accounting -

Book conformity for inclusion of income - Must recognize income for tax purposes no later than the tax year in which the item is recognized as revenue on an applicable financial statement (i.e., the all events test is satisfied no later than the year in which the revenue is recognized for financial accounting purposes)

However, this book conformity requirement does not apply if the taxpayer uses a special method of accounting like long-term construction contracts or installment sales

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REG 1.2 – Gross Income

Key changes pursuant to TCJA applicable to Sole Proprietorships (Schedule C): Cash basis of accounting -

Allowed for small businesses (including Partnerships and Corporations) that have average annual gross receipts of $25 MM or less during the preceding 3 years

Increased from earlier limit of:

$1 MM for Individuals, Partnerships, S-Corporation

$5 MM for C-Corporations and Partnerships with a C-Corporation partner

Accounting for inventories - Not required to use accrual method to calculate COGS and Inventory. May use either of the options:

Treat inventories as non-incidental materials and supplies, or Conform to the taxpayer’s financial accounting treatment of inventories

UNICAP (Uniform Capitalization) rules for inventories - Exempts small businesses that have average annual gross receipts of $25 MM or less during the preceding 3 years [increased from earlier limit of $10 MM]

Business interest expense limitation - Net interest expense (i.e., interest expense less interest income) deduction is limited to 30% of adjusted taxable income plus floor plan financing interest

In other words, annual deduction of interest expense is limited to the sum of: (1) Business interest income, (2) 30% of the adjusted taxable income of the taxpayer, and (3) Floor plan financing interest of the taxpayer for the taxable year

Floor plan financing applies to dealers of motor vehicles, boats, farm machinery or equipment (wherein dealers obtain loans against the high-cost inventory)

However, this rule does not apply to small businesses with average annual gross receipts of $25 MM or less during the preceding 3 years

Qualified business income deduction now applicable @20% of qualified business income from qualified trade/business. Note that this deduction is claimed on page 2 of Form 1040, not on Schedule C

However, the domestic production activities deduction (DPAD) has been repealed with limited exceptions

Changes in rules for deduction of entertainment expenses and few fringe benefits:

Business entertainment expenses (including membership dues) - no longer deductible [vs. 50% deductible earlier]

Meals provided in employer-operated eating facility - now only 50% deductible [vs. fully deductible earlier]

Transportation benefits to employees (for travel between employee residence and place of employment; e.g., transit passes, parking fees) - no longer deductible unless incurred to ensure the safety of the employee [vs. deductible subject to limits earlier]

Moving expense reimbursements - still deductible by employer but is now taxable income to employees except for members of Armed forces [vs. non-taxable fringe benefit for employees earlier]

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Schedule D: Long-term capital gains & losses (holding period > 1 year)

Tax Rates [for 2018, per TCJA]:

0% - Low income taxpayers (those in the 10% - 12% tax bracket)

15% - Most taxpayers (those in the 22% - 35% tax bracket)

20% - Certain high income taxpayers (those in the 35% - 37% bracket)

Schedule E: Qualified business income deduction now applicable @20% of qualified business income

from qualified trade/business (e.g., business income from Partnership or S-Corporation) Also, deduct 20% of qualified REIT (Real Estate Investment Trust) dividends and qualified

PTP (Publicly Traded Partnerships) income Note: This deduction is claimed on page 2 of Form 1040, not on Schedule E

Schedule F: Refer changes for Schedule C.

Note: Unlike for Schedule C, farming losses (on Schedule F) are still allowed the 2-year carryback for NOL

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Earnings from foreign sources

Key changes pursuant to TCJA applicable to Foreign Income: Transition tax (one-time; taxpayers may have to pay a section 965 transition tax when filing

their 2017 tax returns)

Imposes a one-time transition tax on a U.S. shareholder’s (owns 10% or more stake) pro rata share of the foreign corporation’s accumulated post-1986 deferred foreign income, at the rate of:

15.5%, to the extent of the U.S. shareholder’s aggregate foreign cash position, and

8% for the remainder

Earlier rule: Allowed deferral of U.S. tax on foreign active business income earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings

Global Intangible Low-Taxed Income (GILTI) - U.S. shareholder of a CFC (Controlled Foreign

Corporation) required to include GILTI in gross income annually

Definitions: CFC - Foreign corporation over 50% owned by U.S. shareholders U.S. shareholder – Owns 10% or more in CFC

GILTI - Pro-rata share of excess CFC income over the CFC’s “net deemed tangible income return”

“Net deemed tangible income return” = 10% of CFC’s qualified business asset investment

Effectively establishes a global minimum tax on foreign earnings generated in CFCs, irrespective of repatriation back to a US shareholder - other than the CFCs’ deemed tangible return

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Section 965 Transition Tax - further to TCJA, one-time tax which may be applicable (when filing 2017 tax returns) to U.S. shareholders of any Specified Foreign Corporation

One-time transition tax on a U.S. shareholder’s (who owns 10% or more stake) pro rata share of the foreign corporation’s accumulated post-1986 deferred foreign income, at the rate of: 15.5%, to the extent of the U.S. shareholder’s aggregate foreign cash position, and 8% for the remainder

The transition tax may be paid by the taxpayer in 8 installments over 8 years (8% of the net tax liability payable in each of the first 5 installments, 15% payable in installment 6, 20% payable in installment 7 and 25% payable in installment 8)

Earlier rule: Allowed deferral of U.S. tax on foreign active business income earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings

U.S. shareholder of a CFC (Controlled Foreign Corporation) - Required to include Global Intangible Low-Taxed Income (GILTI) in gross income annually

Definitions: CFC - Foreign corporation over 50% owned by U.S. shareholders U.S. shareholder – Owns 10% or more in CFC

GILTI = Pro-rata share of Net CFC Tested Income (-) Net Deemed Tangible Income Return Net Deemed Tangible Income Return = 10% Pro-rate share of CFC’s QBAI (Qualified

Business Asset Investment) (-) Specified Interest expense

TCJA effectively establishes a global minimum tax on foreign earnings generated in CFCs, irrespective of repatriation back to a US shareholder - other than the CFCs’ deemed tangible return

GILTI = CFC Income (-) Deemed “tangible” Income

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REG 1.3 – Adjustments to Gross Income

HSA – up to $3,450/$6,850 for single/family for 2018 [$3,400/$6,750 for 2017] FICA-Social Security - @6.2% for employer plus 6.2% for employee [on max. $128,700 in 2018

vs. $127,200 in 2017] 50% deduction for social security, 50% or less for Medicare (2018)

IRA contribution limits remain unchanged - $5,500 for single ($11,000 for MFJ); additional $1,000 “catch up contribution” allowed if 50+ age

Coverdell IRA – Contribution limit remains unchanged at $2,000 per benefiviary (child <18, or special needs) for 2018

ABLE Accounts (Achieving a Better Life Experience) - Savings program for an eligible individual with blindness/disability who is a designated beneficiary. Contribution limit is 15,000 per beneficiary (same as gift tax). Contribution is also eligible for Saver’s credit

Other adjustments to AGI –

Alimony paid is no longer deductible by the payer if a divorce/separation agreement is entered into after Dec 31, 2018 (or if a divorce/separation agreement on or before Dec 31, 2018, is changed after Dec 31, 2018 to expressly provide that alimony received is not to be included in income). Since the payer is not allowed the deduction, alimony received is now treated as a non-taxable income by the recipient

Domestic Production Activities Deduction (DPAD) has been repealed with limited exceptions

Qualified Moving Expense deduction has been suspended for most taxpayers; continues to apply only for members of U.S. Armed Forces on active duty who move because of a permanent change in station (due to a military order)

Tuition & Fees deduction is now expired (vs. max of $4,000 deduction (self, spouse & dependents) in 2017

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REG 1.4 – Deductions from AGI

Standard deduction for all taxpayers has been significantly increased. E.g.,

Single - Increased to $12,000 in 2018 [vs. $6,350 in 2017]

Married Filing Jointly (MFJ) - Increased to $24,000 in 2018 [vs. $12,700 in 2017]

Changes to itemized deductions (Schedule A):

Overall itemized deductions are no longer limited if AGI (Adjusted Gross Income) is over a certain limit

Medical & Dental expenses {“Mike”} - For 2017 and 2018, medical & dental expenses deductible to the extent >7.5% of AGI.

This is supposed to revert back to >10%-of-AGI from 2019

Taxes {“Takes”} - Deduction of state and local income, sales, and property taxes is limited to a combined,

total deduction of $10,000 ($5,000 if MFS) No deduction for foreign real estate taxes

Interest {“Interest”} - Mortgage interest deductible only on the first $750K of home mortgage interest that is

used to buy, build or substantially improve the taxpayer’s home *earlier limit was $1 MM which still applies if the home loan indebtedness was incurred on or before Dec 15, 2017]

Mortgage insurance premiums are no longer deductible No deduction for home equity loan interest (i.e., home mortgage loan taken for a

purpose other than to buy, build or substantially improve taxpayer’s home)

Charitable contributions {“Charity”} - Higher limitation threshold - Deduction is now limited to 60% of AGI [vs. 50% in 2017]

Casualty & Theft losses {“Casual”} - Can no longer deduct a personal casualty or theft loss unless the loss is from a federally

declared disaster

Other itemized deductions {“Outing”} - Can no longer deduct job-related expenses or other miscellaneous itemized deductions

that were earlier deductible to the extent >2%-of-AGI floor

Qualified business income deduction now applicable @20% of qualified business income from qualified trade/business

Also, deduct 20% of qualified REIT (Real Estate Investment Trust) dividends and qualified PTP (Publicly Traded Partnerships) income

However, the domestic production activities deduction (DPAD) has been repealed with limited exceptions

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REG 1.5 – Calculating Tax

Most tax rates have been reduced

New tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% from 2018 (vs. 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% in 2017)

Also, Alternative Minimum Tax (AMT) exemption amount has been increased

Kiddie Tax – Simplified calculation. Tax on child’s unearned income is now calculated by effectively applying the ordinary & capital gains tax rate applicable to trusts/estates to the net unearned income of a child *vs. parent’s tax rates as used earlier+

REG 1.7 – Alternative Minimum Tax

Fewer adjustments to itemized deductions required - only Taxes need to be added-back AMT exemption amount has been increased:

For MFJ taxpayers, exemption for 2018 is If AMTI <= $1 MM, exemption = $109,400; If AMTI > $1 MM, exemption = $109,400 –

25% x (AMTI - $1,000,000)

For single taxpayers, exemption for 2018 is If AMTI <= $500K, exemption = $70,300; If AMTI > $500K, exemption = $70,300 – 25% x

(AMTI - $500,000) AMT Tax Rate (applicable on the AMT tax base) for MFJ / Single for 2018:

If AMT tax base <= $191,100, AMT tax rate = 26%; If AMT tax base > $191,100, AMT tax rate = 26% for first $191,100 plus 28% on the excess >$191,100

REG 1.8 – Tax Credits

Increased child tax credit and additional child tax credit | New credit for other dependents

For 2018, the maximum child tax credit has increased to $2,000 per qualifying child, of which $1,400 can be claimed for the additional child tax credit

However, Social security number (SSN) now required for child tax credit

New non-refundable credit for other dependents (who cannot be claimed for the child tax credit) @$500 per dependent

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REG-2

REG 2.1 – Capital gains & losses

Fund investment of capital gains - If the taxpayer has capital gains and invests these in

Qualified Opportunity Funds (QOFs), the taxpayer may be able to elect to defer part or all of the

gain that the taxpayer would otherwise include in income

QOF - Investment vehicle that is set up as either a partnership/corporation for investing in

eligible property that is located in a Qualified Opportunity Zone

Opportunity Zones are basically economically-distressed communities where the U.S.

government intends to spur economic development and job creation

Note:

- Investment in the QOF needs to happen within 180 days from the date the capital

gain was realized

- Only the capital gain needs to be reinvested in the QOF, and not the entire sales

proceeds

- The period of capital gain tax deferral ends on the earlier of the date the investment

is sold or Dec 31, 2026

Basis for QOF investment is considered as $0 to the extent of deferred capital gain

invested into the QOF

- If the taxpayer holds the QOF investment for 5 years, then basis in the investment is

increased by 10% of the deferred gain invested in the QOF (i.e., 90% of the initial

capital gain will now be subject to tax)

- If the taxpayer holds the QOF investment for 7 years, then basis in the investment is

increased by an additional 5% of the deferred gain invested in the QOF (i.e., 85% of

the initial capital gain will now be subject to tax)

- In order to receive the 15% basis adjustment, the QOF investment needs to be

completed by Dec 31, 2019, since the deferral period ends Dec 31, 2026

Further, if the taxpayer holds the QOF investment for 10 years, the taxpayer need not

pay tax on any post-acquisition appreciation gain realized on the sale of the QOF

investment

E.g., In 2019, Freeman realizes capital gains of $300,000, which he invests into QOF within

180 days. Basis in the QOF investment = $0.

2024 (5 years later) - Freeman receives a 10% ($30,000) step-up in basis (i.e., only $270,000

of the $300,000 capital gain would be taxable if the QOF investment is sold).

2026 (7 years later) - Freeman receives an additional 5% ($15,000) step-up in basis (i.e.,

only $255,000 of the $300,000 capital gain would be taxable if the QOF investment is sold).

Note that the deferral period ends Dec 31, 2026, and the taxpayer needs to pay tax on

$255,000 even if the QOF investment is not yet sold.

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2030 (10+ years later) - Freeman sells the QOF investment for $900,000 (i.e., $600,000 of

post-acquisition appreciation). However, since the investment is held for over 10 years, the

sale is tax-free and no tax is payable on the $600,000 gain.

Exchange of like-kind business/investment real property - Per TCJA, non-recognition of

gain/loss is only allowed for real property. Does not cover:

Tangible personal property such as automobiles, machinery, equipment [was covered prior

to TCJA]

Intangible assets

(Prior to TCJA, deferral of gain or loss on like kind exchange of personal property was

allowed)

REG 2.2 – Gains & Losses from sale of Long-term business property

Per TCJA, gain/loss arising from sale of self-created patent, invention, model or design, secret formula or process, are treated as ordinary income

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REG 2.3 – Depreciation & Amortization

Section 179 Expense - Expenses upto $1 MM of qualified property costs placed in service during the tax year; phase out threshold increased to $2.5 MM

Besides business equipment and off-the-shelf computer software, qualified property now includes certain qualified improvement to non-residential real property (which are done after such property was first placed in service). Includes roofs, HVAC (Heating, Ventilation, and Air-Conditioning), fire protection and alarm systems, security system

Bonus Depreciation – Allows 100% bonus depreciation on qualified property

Also, now allowed for purchase of used property [vs. only allowed for new property earlier]

Phases down after 2022: 80% for property placed in service during 2023; 60% for 2024; 40% for 2025; and 20% for 2026

Other provisions:

Luxury automobiles - Increases allowable depreciation for certain passenger automobiles with increased allowable depreciation in succeeding years

Farm property depreciation – Shortens the recovery period from 7 to 5 years Removes the requirement to use the 150% declining balance recovery method for farm

machinery/equipment (i.e., can use 200% declining balance as applicable for the relevant class)

However, note that a farming business is allowed to elect not to apply the 30% net interest expense limitation. In case of such an election, it is required to use ADS to depreciate its property with a recovery period of 10 years or more (and such property is not eligible for bonus depreciation)

Real property cost recovery - Shortens recovery period of residential rental property to 30 years for alternative depreciation system (ADS) purposes Note that real property trades/businesses are allowed to elect not to apply the 30% net

interest expense limitation. In case of such an election, they are required to use ADS to recover nonresidential real property, residential rental property and qualified improvement property (and such property is not eligible for bonus depreciation)

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REG-3

REG 3.2 – C-Corp Income Tax Return = Form 1120

Key changes pursuant to TCJA applicable to C-Corporations:

Tax rates - Graduated corporate tax structure (with 35% as the highest tax rate) has been replaced with a flat 21% corporate tax rate

Alternative Minimum Tax (AMT) – No longer applicable to corporations

Corporations may treat a portion of their prior year alternative minimum tax credit carryover as refundable

Base Erosion Anti-abuse Tax (BEAT) - Imposes a minimum tax on certain deductible

payments made to a foreign affiliate, including payments like royalties and management fees, but excluding payments for inventory

Applies if the corporation had gross receipts of at least $500 million in any one of the 3 tax years preceding the current tax year

Transition tax (one-time; taxpayers may have to pay a section 965 transition tax when filing their 2017 tax returns) Imposes a one-time transition tax on a U.S. shareholder’s (owns 10% or more stake) pro rata share of the foreign corporation’s accumulated post-1986 deferred

foreign income, at the rate of:

15.5%, to the extent of the U.S. shareholder’s aggregate foreign cash position, and

8% for the remainder

Earlier rule: Allowed deferral of U.S. tax on foreign active business income earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings

Global Intangible Low-Taxed Income (GILTI) - C-Corporation which is a shareholder of a CFC

(Controlled Foreign Corporation) required to include GILTI in gross income annually

Definitions: CFC - Foreign corporation over 50% owned by U.S. shareholders U.S. shareholder – Owns 10% or more in CFC

GILTI - Pro-rata share of excess CFC income over the CFC’s “net deemed tangible income return”

“Net deemed tangible income return” = 10% of CFC’s qualified business asset investment

Effectively establishes a global minimum tax on foreign earnings generated in CFCs, irrespective of repatriation back to the US shareholder - other than the CFCs’ deemed tangible return

Foreign-Derived Intangible Income (FDII) deduction – New section 250 allows a domestic

corporation a deduction for the eligible % of GILTI and FDII (for 2018-25, upto 37.5% of FDII and 50% of GILTI)

Deduction for foreign-source portion of dividends received by domestic corporations from specified 10%-owned foreign corporations - Certain domestic corporations that are U.S. shareholders of specified 10%-owned foreign corporations are allowed a 100% deduction (“participation exemption DRD”) for the foreign-source portion of dividends received from the foreign corporation

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REG 3.3 – Income

II A) Dividends from Domestic Corporation

Dividends received from less-than-20%-owned domestic corporations Special Deduction: Per TCJA, 50% DRD is applicable

Dividends received from 20%-or-more-owned domestic corporations Special Deduction: Per TCJA, 65% DRD is applicable However, do not include dividends from 80%-or-more-owned domestic corporations

which have been consolidated on the tax return (whereby intercompany dividends are eliminated)

Special Deduction: DRD (Dividend Received Deduction) -

Purpose is to avoid triple taxation on dividends 1st level of tax: Corporation A paying out the dividend pays income tax on its income

before dividend payout 2nd level of tax: Corporation B receiving the dividend needs to pay tax on the

dividend income; this level of tax is avoided by 50%-65% via DRD (and avoided 100% if consolidated)

3rd level of tax: When Corporation B pays out the dividend to individual stockholders, it is taxable as Dividend Income on their Form 1040

DRD Requirements (applicable to the investing corporation now receiving the dividend): DRD is only available to C-Corporations; not LLCs, S-Corporations, or individuals Stock must be more than 46 days during the 91-day period beginning on the date 45

days before the ex-dividend date DRD does not apply to preferred stock Stock must not be debt-financed

If debt-financed, the 50% (or 65%) DRD is reduced by a % that is related to the $ of debt incurred to acquire the stock (rationale is that debt would result in an interest expense)

DRD % which generally applies to amount of dividend income (except in exception cases): Less-than-20% ownership (small investment) = 50% DRD per TCJA 20%-or-more-ownership (large investment) = 65% DRD per TCJA 80%-or-more ownership = Consolidated tax returns (if filed) eliminate intercompany

dividends (whereby intercompany dividends are not even included as income)

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Exception case: DRD % (only for 50% and 65%) is applied on the lesser of Dividend Income OR Taxable Income (unless applying the DRD % on the Dividend Income creates the NOL; in this, DRD is again calculated on the Dividend Income)

E.g., Assume that dividend income is $100 from 20%-or-more owned domestic corporations. In this case, $65 deduction (i.e., 65% of $100 dividend) will be allowed if taxable income is greater than $100 or less than $65; however, if taxable income is the range of $65 - $100, then the 65% DRD is applied on the actual taxable income

Case 1 Case 2 Case 3 Case 4 Case 5

Sales 550 500 450 400 350

Dividend income 100 100 100 100 100

Gross income 650 600 550 500 450

Ordinary deductions (470) (470) (470) (470) (470)

Income before DRD 180 130 80 30 (20)

DRD (50%) (65) (65) (52) (65) (65)

Taxable income 115 65 28 (35) (85)

DRD = lesser of: (1) 65% (or 50%) of Dividend recd.

(2) 65% (or 50%) of taxable income (before DRD)

Remember: “Exception” (2) does not apply if (1) results in a NOL. ∴ In most cases, (1) applies

Exception Exception Lesser=100

Lesser=100

Lesser=80

NOL NOL

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II B) Dividends from Specified Foreign Corporations

Foreign-source portion of dividends received from specified 10%-owned Specified Foreign Corporations (SFC)

Special Deduction: Per TCJA, 100% DRD is applicable on the foreign-source portion of dividends received from a specified foreign corporation Background - With the 100% DRD for dividends from specified foreign corporations,

TCJA establishes the “participation exemption” system in an endeavor to move the U.S. away from a world-wide tax system and closer to a territorial tax system (whereby U.S. corporations do not have to pay U.S. tax for earnings/dividends from foreign investments/subsidiaries)

Introduced to encourage US MNC’s to repatriate foreign-earned income back to the U.S.

However, the system is only a hybrid territorial tax system (with a limited participation exemption) since U.S. corporations still have to pay U.S. tax on their CFC’s Subpart F income & GILTI

This 100% DRD is also referred to as “participation exemption DRD” Given the 100% DRD, foreign tax credit is not available for any foreign income taxes

imposed on the dividend payment Applies even if the foreign corporation is not a CFC

CFC (Controlled Foreign Corporation) - Foreign corporation that is: - 10%-or-more owned by the taxpayer (whether in terms of voting power OR

value), AND - Over-50% owned by one/more U.S. shareholders (i.e., taxpayer plus all other

U.S. shareholders)

Note: CFC’s are in essence a subset of Specified Foreign Corporations (SFC) However, dividends from PFICs (Passive Foreign Investment Companies) do not

qualify for the 100% DRD

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II C) Subpart F “Inclusion” from a CFC

Background - The Subpart F rules were first enacted as part of the Revenue Act of 1962. Since then, they have been amended numerous times. In particular, the Tax Reform Act of 1986 significantly expanded the coverage of Subpart F

CFC (Controlled Foreign Corporation) - Foreign corporation that is: 10%-or-more owned by the taxpayer (whether in terms of voting power OR value), AND Over-50% owned by one/more U.S. shareholders (i.e., taxpayer plus all other U.S.

shareholders) Subpart F inclusion - Pro-rate share of certain subpart F income of CFC on which the U.S.

shareholder has to pay tax in the year the income is earned by the CFC (irrespective of whether or not distributed as dividend) Subpart F income - Generally includes income that is relatively movable from one taxing

jurisdiction to another and is subject to low rates of foreign tax. Consists of: Foreign Personal Holding Company Income (FPHCI) - Generally includes a CFC’s

income from dividends, interest, annuities, rents, royalties, and net gains on dispositions of property producing any of the foregoing types of income. Reason for including FPHCI is to prevent U.S. shareholders to defer U.S. tax on portfolio/passive income of their CFCs Foreign Base Company Sales Income (FBCSI) - Related-party purchases and sales

of personal property made through a CFC if the country of the CFC’s incorporation is neither the origin nor the destination of the goods and the CFC itself has not “manufactured” these goods. Reason for including FBCSI is to prevent U.S. shareholders from using their CFCs to shift sales income from the U.S. to foreign jurisdictions to avoid U.S. tax

Foreign Base Company Services Income (FBC Services Income) - Income from services performed by a CFC for or on behalf of a related party where the services are performed outside the country of the CFC’s incorporation. Reason for including FBC Services Income is to prevent U.S. shareholders from using their CFCs to shift services income from the U.S. to foreign jurisdictions to avoid U.S. tax

Foreign tax credit applies (i.e., U.S. shareholder gets a foreign tax credit to the tune of the foreign tax paid by the CFC attributable to the Subpart F inclusion)

Since U.S. shareholder pays tax on Subpart F income when earned, any dividend received attributable to the Subpart F income is tax-free (to avoid double taxation on such “previously taxed income”) However, per TCJA, anyways all foreign-source dividends from CFC’s (whether or not

attributable to Subpart F) are eligible for 100% DRD Note: C-Corporations do not have to pay any U.S. tax on the foreign-source non-Subpart

F income of CFC since No tax when earned (unlike subpart F income)

However, this is subject to the “GILTI” inclusion Per TCJA, no tax even when repatriated back to the U.S. as dividends (via 100% DRD)

Note that this used to be taxable under earlier law. Therefore, to accommodate for the transition to the 100% DRD on foreign-source dividends and tax any accumulated untaxed foreign earnings as of end-2017, TCJA imposed a “one-time” Section 965 transition tax

“Inclusion” when earned (irrespective of dividend pay-out).

Mostly applicable since 1987 (and continues as is)

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II D) Section 965 “Inclusion” (per TCJA)

Background -

Earlier U.S. tax rules allowed deferral of U.S. tax on foreign active business income earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings

However, since that the new U.S. tax rules (further to TCJA) would allow tax-free repatriation of foreign income (with 100% DRD), TCJA imposes a “one-time” Section 965 transition tax on the foreign earning which have been accumulated post-1986 and as of end-2017. In other words, these accumulated untaxed earnings are taxed as if these earnings are repatriated to the U.S.

Section 965 inclusion (per TCJA) - Post-1986 accumulated untaxed foreign earnings of 10%-or-more owned specified foreign corporations as of Nov 2, 2017, or Dec, 31, 2017 (whichever is higher)

Taxpayers may elect to pay this “one-time” tax calculated as of end-2017 in 8 installments over 8 taxable years: Installment 1 - 5: 8% of the net Section 965 tax liability (i.e., total of 40% over 5

installments) Installment 6: 15% of the net Section 965 tax liability Installment 7: 20% of the net Section 965 tax liability Installment 8: 25% of the net Section 965 tax liability

Special deduction (per Section 965): The tax rate for the “one-time” Section 965 transition tax is

15.5%, to the extent of the U.S. shareholder’s aggregate foreign cash position, and

8% for the remainder Therefore, given that the corporate tax rate is 21% for the years 2018 & onwards,

special deduction allowed is

26.19% to the extent of the U.S. shareholder’s aggregate foreign cash position (i.e., tax is paid on 73.81% of the Section 965 amount attributable to the installment for years 2018 & onwards; basically, 73.81% of the 21% corporate tax rate = 15.5%)

61.90% for the remainder (i.e., tax is paid on 38.10% of the Section 965 amount attributable to the installment for years 2018 & onwards; basically, 38.10% of the 21% corporate tax rate = 8%)

“Inclusion” for 1987-2017 (irrespective of dividend pay-out)

= CFC non-subpart F accumulated foreign income +

“non-CFC” SFC’s accumulated foreign income

To bring down effective tax from 21% to 15.5% & 8%

20

II E) Global Intangible Low-Taxed Income (GILTI) “Inclusion”

Background - GITLI has been introduced by TCJA to discourage corporations from moving

intangibles outside of the U.S. and then bringing back foreign earnings tax-free (esp. given the 100% DRD now applicable on foreign dividends from specified foreign corporations). Therefore, any income earned by U.S. corporations outside of the U.S. which is deemed to have been earned from intangible assets (i.e., in excess of 10% of foreign business assets) in taxed in the year earned. Furthermore, there is a 50% deduction allowed for GILTI which means that the effective tax rate on GILTI is 10.5% (50% of the current corporate income tax rate of 21%)

Global Intangible Low-Taxed Income (GILTI) - From a CFC (Controlled Foreign Corporation) in which the taxpayer is a 10%-or-more shareholder

GILTI - Pro-rata share of excess CFC income over the CFC’s “net deemed tangible income return” “Net deemed tangible income return” = 10% of CFC’s qualified business asset

investment

Effectively establishes a global minimum tax on foreign earnings generated in CFCs, irrespective of repatriation back to the US shareholder - other than the CFCs’ deemed tangible return

Special deduction (per Section 250): Per TCJA, 50% of GILTI is allowed as a special deduction (i.e., effective tax rate on GILTI is 50% of corporate tax rate of 21% = 10.5%)

Foreign tax credit applies but only upto 80% of the foreign taxes deemed to have been paid on the GILTI income Note that this scale-down of foreign taxes to 80% only applies to GILTI income (not

to any CFC subpart F income) Also, this foreign credit is only applicable for corporations (not for individuals unless

the individual elects to be taxed as a corporation for certain items)

“Inclusion” from 2018 onwards =

Tax on excess profits by CFC’s

21

REG 3.4 – Deductions

Political expenditures or lobbying expenses in connection with influencing federal, state or local government bodies Earlier, lobbying expenses for legislation before local government bodies was

deductible; however, this was repealed by TCJA

Membership dues (for civic or public service organizations, professional organizations,

business leagues, trade associations, chambers of commerce, boards of trade, clubs) - non-

deductible pursuant to TCJA

However, may be deductible only if the amounts are treated as compensation to the

recipient and reported on Form W-2 for an employee

Employee transportation - non-deductible pursuant to TCJA. E.g.,

Qualified transportation fringe benefit to employees [prior law: allowed with

limitations]

Transportation for commute between the employee's residence and place of

employment is non-deductible (except as necessary for ensuring the safety of the

employee)

Compensation of officers - Can only deduct up to $1 MM (including performance based compensation & commissions) for each of the “covered employees”

“Covered employees” include CEO, CFO and 3 highest compensated officers; also, any formerly covered employee is deemed to be a covered employee (i.e., the status continues in perpetuity)

Business interest expense limitation - Net interest expense (i.e., interest expense less

interest income) deduction is limited to 30% of adjusted taxable income plus floor plan financing interest In other words, annual deduction of interest expense is limited to the sum of:

(1) Business interest income,

(2) 30% of the adjusted taxable income of the taxpayer, and

(3) Floor plan financing interest of the taxpayer for the taxable year

Floor plan financing applies to dealers of motor vehicles, boats, farm machinery or equipment (wherein dealers obtain loans against the high-cost inventory)

However, this rule does not apply to small businesses with average annual gross receipts of $25 MM or less during the preceding 3 years

(+)

(+)

22

Business meals – 50% deductible only if directly related/associated with the conduct of

business, takes place between a business owner or employee and a current/prospective

client, furnished at a restaurant without any entertainment value, not lavish/extravagant,

and reasonable expectation of deriving income or other business benefit from the meeting

If charity, 100% may be deducted as itemized expense for charity

Note: Per TCJA, business entertainment expense (including membership dues) is

now non-deductible even if related with or associated with business[vs. 50%

deductible earlier]

However, may be deductible only if the amounts are treated as compensation to

the recipient and reported on Form W-2 for an employee

NOL deduction - Using NOL incurred in other tax year(s) to reduce taxable income in the

current tax year (applicable only if the corporation has a positive taxable income in the

current tax year).

Per TCJA, NOL’s for tax years beginning in 2018 and onwards may be carry-forward

indefinitely but may be deducted only upto 80% of taxable income (wherein the

taxable income is computed without regard to any NOL carryover)

However, carry-back is no longer allowed [only NOL attributable to farming losses is allowed a 2-year carry-back]

E.g., Charlie Corp. starts business in 2018, and has $95,000 NOL for the year which has been carried-

forward.

Assuming that taxable income for 2019 is $100,000, Charlie can deduct $80,000 (i.e., lesser of $95,000, or

80% of $100,000) as NOL deduction on its 2019 tax return. The balance NOL of $15,000 from 2018 may be

deductible from taxable income on or after 2020 tax year

For NOLs of years prior to 2018, earlier rules apply: 2-year carry-back/20-year carry-forward rule applies

For instance, any NOL carryover from 2017 [remaining after carry-back to 2015 and 2016 if elected & applicable] can be carry-forward 20 years only

Deductible upto 100% of taxable income

23

Special Deductions - Include:

DRD (Dividend Received Deduction) - 50% DRD for dividends from less-than-20%-owned domestic corporations 65% DRD for dividends from 20%-or-more-owned domestic corporations 100% DRD for foreign-source dividends from 10%-or-more-owned specified foreign

corporations

Special Deduction per Section 965 - Used to arrive at the effective transition tax rate on 15.5%, to the extent of the U.S. shareholder’s aggregate foreign cash position, and 8% for the remainder

Special Deduction per Section 250 - Special Deduction upto 50% of GILTI (Global Intangible Low-Taxed Income)

GILTI is the pro-rata share of excess CFC income over the CFC’s “net deemed tangible income return” {sort-of penalty imposed by TCJA for generating excessive returns on foreign CFCs which is generally achieved by migrating intangible assets offshore}

With the Section 250 Special Deduction applicable @50% of GILTI, effective GILTI tax rate is 10.5% (i.e., 50% of 21%)

Special Deduction upto 37.5% of FDII (Foreign-Derived Intangible Income)

FDII is a special incentive for C-Corporations introduced by TCJA who generate 10%+ returns on their U.S. assets by exporting goods/services to foreign customers (which may generally be achieved only if the intangible assets are retained in the U.S., but is not necessarily derived from intangible assets)

The FDII deduction calculation is pretty complex, and may be broken down into the below steps: - Step 1: Determine DEI (Deduction Eligible Income) - Gross income of the C-

Corporation with certain exclusions - Step 2: Determine FDDEI (Foreign-Derived Deduction Eligible Income) -

Foreign portion of DEI. Includes: DEI derived from sales, leases, exchanges, or other dispositions of

property to a foreign person for a foreign use DEI derived from a license of property to a foreign person for a foreign

use DEI derived from services provided to a person or with respect to

property located outside of the U.S. QBAI comprises the business assets used for achieving the FDDEI plus any

pro-rata share of any business assets which were used for achieving both FDDEI and non-FDDEI

- Step 3: Determine FDR (Foreign Derived Ratio) = FDDEI / DEI - Step 4: Determine DII (Deemed Intangible Income) - Excess (if any) of the

corporation’s DEI over 10% of its Qualified Business Asset Investment (QBAI) - Step 5: Determine FDII (Foreign-Derived Intangible Income) = DII x FDR

With the Section 250 Special Deduction applicable at 37.5% of FDII, effective FDII tax rate is 13.125% (i.e., 62.5% of 21%)

“Stick” =

Discourage

intangibles

@offshore

“Carrot” =

Encourage

intangibles

@U.S.

24

REG 3.5 – Tax Computation

Alternative Minimum Tax (AMT) - Repealed by TCJA for corporations

AMT credit carryover from prior years can continue to be utilized against regular income tax liability. For tax years 2018, 2019 and 2020, 50% of the excess AMT credit carryover is refundable. Starting 2021, any remaining AMT credit is fully refundable

Section 965 Transition Tax - further to TCJA, one-time tax which may be applicable (when filing 2017 tax returns) to U.S. shareholders of any Specified Foreign Corporation

One-time transition tax on a U.S. shareholder’s (who owns 10% or more stake) pro rata share of the foreign corporation’s accumulated post-1986 deferred foreign income, at the rate of: 15.5%, to the extent of the U.S. shareholder’s aggregate foreign cash position, and 8% for the remainder

Taxpayers may elect to pay this “one-time” tax calculated as of end-2017 in 8 installments over 8 taxable years: Installment 1 - 5: 8% of the net Section 965 tax liability (i.e., total of 40% over 5

installments) Installment 6: 15% of the net Section 965 tax liability Installment 7: 20% of the net Section 965 tax liability Installment 8: 25% of the net Section 965 tax liability

Background - Earlier U.S. tax rules allowed deferral of U.S. tax on foreign active business income

earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings

However, since that the new U.S. tax rules (further to TCJA) would allow tax-free repatriation of foreign income (with 100% DRD), TCJA imposes a “one-time” Section 965 transition tax on the foreign earning which have been accumulated post-1986 and as of end-2017. In other words, these accumulated untaxed earnings are taxed as if these earnings are repatriated to the U.S.

25

Base Erosion Anti-Abuse Tax (BEAT) - Introduced by TCJA, and acts as a limited-scope AMT applied by adding back certain deductible payments made to related foreign persons

Background - Per TCJA, U.S. domestic corporations are allowed deduction for dividend received from foreign corporations. Since this deduction can reduce U.S. tax on foreign profits, BEAT was also introduced to deter U.S. corporations from eroding the U.S. tax base by paying tax-deductible expenses to foreign affiliates and then receiving back tax-free dividends

Note: BEAT does not apply to RIC (Registered Investment Company), REIT (Real Estate Investment Trust) and S-Corporations

Applies if:

Corporation had gross receipts of at least $500 million in any one of the 3 tax years preceding the current tax year, and

Base erosion % is at least 3% (2% in the case of banks and securities dealers) Base erosion % = Base Erosion tax benefits / Aggregate deductions of the

corporation

BEAT = 10% of “modified taxable income”, less a portion of some tax credits

Modified Taxable Income = Taxable Income (+) Base Erosion tax benefits

(+) Any NOL carryover x Base Erosion %

Rate is lower @5% for 2018 only; but increases to 12.5% after 2025

“Base Erosion tax benefits” - Sum of base erosion payments identified, with some exceptions

“Base erosion payment” - Any amounts paid/accrued to a foreign related party for which a deduction is allowable (like royalties and management fees). Includes purchases of depreciable property from a foreign related party Excludes:

Payments for inventory

Payment for services (calculated per “Service Cost Method” transfer pricing method) which are billed by the foreign related party without any markup component

Certain “qualified derivative payments” where the underlying derivative is annually marked to market

Exceptions: For payments for purchases of depreciable property to foreign related parties, only

the depreciation deduction is considered (rather than the entire purchase price) Exclude any payments that have been subject to U.S. tax and for which tax was

withheld

If BEAT is applicable, tax computed under BEAT is compared to the corporation’s regular tax liability. If BEAT is higher, the corporation pays the additional tax computed under BEAT

Similar to how AMT works

Add-back

26

REG-4

REG 4.1 – S Corporation

Key changes pursuant to TCJA applicable to S-Corporations:

S-Corporation Eligibility Criteria and Formation/Election - As a general rule, trusts cannot be S-Corp shareholders. However, an exception under TCJA now allows Electing Small Business Trusts (ESBTs) to be S-Corp shareholders

However, the portion of an ESBT that owns S-Corp stock is treated as a separate trust and the S-Corporation income allocated to the ESBT is taxed to the trust itself (rather than pass-thru to the trust’s beneficiaries)

Further, any charitable contribution deduction for the portion of ESBT holding S-Corporation stock is determined under the rules applicable to Individuals, rather than those applicable to trusts

Non-resident alien individual allowed to be a potential current beneficiary of an ESBT

Section 965 Transition tax - Special election rules are available for S-Corp shareholders wherein each S-Corp shareholder can elect to defer the payment of the net tax liability until the tax year in which any of the following triggering event occurs:

Corporation ceases to be an S-Corporation S-Corp liquidates or sells substantially all of its assets, ceases its business, ceases to

exist or any similar circumstance The shareholder transfers shares in the S-Corp; transfers of less than all of the stock

in an S-Corp are a triggering event only with respect to the transferred shares

Conversion from S-Corp to C-Corp - TCJA modifies existing laws for an eligible S-Corp which terminates the S-Corp election and converts to a C-Corp during the 2-year period beginning Dec 22, 2017, and has the same owners of stock in identical proportions on Dec 22, 2017, and on the date of revocation:

Adjustments resulting from the change in accounting method (e.g., cash to accrual method) - May be spread over a 6-year period starting with the year of change [vs. 4-year period earlier]

Distributions to shareholders - During PTTP (Post Transition Termination Period) - Distributions treated as

first coming from AAA - i.e., tax-free [same as earlier rule] PTTP begins on the day of termination and ends on the later of (1)

one year after the termination date, or (2) the due date for filing the final S-Corp tax return (including extensions)

After expiration of PTTP - Distributions treated as coming out of the corporation’s AAA (tax-free) or E&P (taxable as dividend) in the same ratio as the amount of the corporation’s AAA bears to the amount of the corporation’s accumulated E&P [whereas the earlier rule treated distributions as coming first from the corporation’s E&P and, thus, was entirely taxable as a dividend to that extent]

27

REG 4.2 – Partnership

Termination of partnership - Reasons for a partnership termination for tax purposes:

Electing termination for large partnerships (over 100 partners)

Operations of the business are discontinued

Business is reduced to one partner

Technical termination - 50% or more of partnership interest change hands within a 12 month period [no longer applicable further to TCJA]

28

REG 4.3 – Estates, Trusts & Gift Taxes

Tax Rates for 2018 [Note that the top rate of 37% is reached very quickly @$12,500 taxable income]

Column A Column B Column C Column D

Taxable Amount over

Taxable Amount not

over

Tax on Amount in Column A

Rate of tax on excess over amount in Column

A

$0 $2,550 $0 10%

$2,550 $9,150 $255 24%

$9,150 $12,500 $1,839 35%

$12,500 $3,011.50 37%

Unified Credit - Credit that is large enough to eliminate the tax on an estate equal to the lifetime exclusion of $11.18 MM in 2018 and $11.40 MM in 2019

2018: Credit = $4,417,800 (implies a deduction of $11,180,000) 2019: Credit = $4,505,800 (implies a deduction of $11,400,000)

Gift tax Exclusions - (gifts not reportable/taxable) $15,000 in “present interest” gift to a single individual ($30,000 for MFJ) during the year.

Key changes pursuant to TCJA applicable to S-Corporations:

Form 1041: Most tax rates for estates & trusts have been reduced - Highest tax rate of 37% from 2018 [vs. 39.6% in 2017]

Form 706 & 709: Increased basic exclusion amount to $10 MM, indexed for inflation, for estates of decedents dying after Dec 31, 2017 [vs. earlier exclusion of $5 MM, indexed for inflation]

2018 exclusion of $11.18 MM (implies unified credit of $4,417,800)

Form 709: Increased annual gift tax exclusion to $15,000 / $30,000 if MFJ [vs. $14,000 / $28,000 earlier]

29

REG 4.4 – Tax-Exempt Organizations

Key changes pursuant to TCJA applicable to Tax-Exempt Organizations:

Unrelated Business Income (UBI) - Tax-exempt organizations are required to compute net UBI separately for each unrelated trade or business. A loss derived from one UBI cannot offset the other and NOL deductions are only allowed for that trade or business from which the loss arose

Increase in UBTI (Unrelated Business Taxable Income) by disallowed fringe benefits - For organizations that have employees, UBTI reported on Form 990-T, is increased by any amount for which a deduction is not allowable (e.g., entertainment, amusement, recreation, transportation fringe benefit)

Excise taxes on executive compensation - Imposes an excise tax @21% on an organization that pays to any covered employee more than $1 MM in remuneration or pays an excess parachute payment during the year starting in 2018

Excise Tax on net investment income - Imposes an excise tax @1.4% on net investment income of certain colleges and universities

30

REG-5

REG 5.3 – Tax Planning

Tax planning intends to achieve financial goals in the most tax-efficient manner possible.

Few general tax planning strategies involve:

Timing - The timing of income or expense recognition in any tax year, affects the tax

liability because of time value of money. Most taxpayers are advised to take a deduction

in the current period and postpone the recognition of income to a future period. E.g.,

Installment sale - When structured as an installment sale, income recognition

deferred over multiple years

Itemized deductions - If total itemized deductions are approximately the same as

the standard deduction, may benefit from bunching itemized deductions into one

year and take the standard deduction in the following year (say, for a cash-basis

taxpayer, by paying the itemized deductions for a couple of years in one year)

By alternating standard deduction and itemized deductions years, may be able to

maximize deductions over a multiyear time frame

Short-term capital gain - If there are short-term capital gains (which are taxed at

ordinary income tax rates), consider selling capital assets that will generate capital

losses in order to offset the short-term capital gain (allowed to deduct up to $3,000

of net capital loss against ordinary income each year, with any excess net capital loss

carried forward to future years)

Bonus depreciation - Per TCJA, 100% expensing allowed for purchase of any tangible

personal property upto 2022 (and phases out thereafter). So businesses may

consider acquiring new business assets

Accounting method – Per TCJA, small businesses (with average annual gross receipts

of $25 MM or less during the preceding 3 years) allowed to use cash basis of

accounting

Income and Deduction Shifting - This planning strategy seeks to take advantage of the

differences in tax rates between taxpayers, or between taxing, jurisdictions. The goal is

to shift income from high-tax rate to low-tax rate taxpayers or jurisdictions, and to shift

deductions from low-tax rate to high-tax rate taxpayers or jurisdictions. E.g.,

Children - Parents can reduce their family’s income tax by shifting income that

would otherwise be taxed at higher rates to their children whose income is taxed at

lower rates. Even if the kiddie tax applies, the first $12,500 of unearned (e.g.,

interest) income will be taxed at less than the highest tax rate of 37%

Gift tax exclusion - If interested in family wealth planning, consider the annual gift

tax exclusion when gifting appreciated assets to family members. There is an annual

$15,000 exclusion (for 2018) per donee for gifts of a present interest. This means

that up to $15,000 of gifts can be given to a donee without making a taxable gift

31

Gift & Estate unlimited marital deduction - Gifts/estates can be transferred without

any limit to spouses. This allows married couples to:

Be able to gift upto $30,000 to a donee without making a taxable gift (i.e.,

@$15,000 x 2)

Double their basic gift/estate exclusion amount (i.e., $11.18 MM exclusion for

each x 2) and not pay any gift/estate tax for upto $22.36 MM of taxable gifts or

estate by the couple

Business entity choice - May need to be reconsidered post-TCJA

C-Corps - now flat 21% tax (vs. top rate of 35% under prior law). However,

double taxation still applies as individuals need to pay tax on dividend income

Pass-thru entities (S-Corps, partnerships) or Sole Proprietorship - income is

taxable on individual shareholder/partner/proprietor’s tax rate (highest rate of

37%). However, the shareholder/partner/proprietorship can claim a 20%

Qualified Business Income deduction on business income

Conversion - This planning strategy involves converting ordinary income that would be

taxed at regular rates into income that will be taxed at a preferential rate. Additionally,

this strategy might be applied to convert deductions that would be subject to limitations

into ordinary deductions that are deductible without limitation. E.g.,

Sale of a company - If considering the sale of a business, may attempt to structure

the transaction as a sale of the company’s stock rather than a sale of the company’s

assets. A sale of the company’s stock generally results in gain eligible for reduced

capital-gains rates, as opposed to a sale of assets which may be taxed as ordinary

income

Qualified dividends - May want to consider replacing investments generating

interest income taxed at regular rates, with stocks paying qualified dividends that

are taxed at a reduced rate of 15-20% or even 0% (if the taxpayer is in the 10% or

15% bracket). In order to qualify for the reduced rate, the underlying stock upon

which a dividend is paid must be held for at least 61 days during the 121-day period

beginning 60 days before the ex-dividend date (91 days of the 181-day period for

preferred stock)

Passive activities - May be able to increase participation in what would otherwise be

a “passive activity” in order to classify the activity as an active business activity

whose losses are currently deductible. Alternatively, may be able to decrease

participation in a profitable business activity in order to classify the income as

passive activity income that could then be sheltered by losses generated from other

passive activities