tax reform – individual & business considerations€¦ · proposal current tax law house bill...

12/7/2017

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Tax Reform –Individual & Business Considerations

P RE S E NTE D B Y: E RNI E S K YRME

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1 What’s happened so far?

How do the House & Senate tax bills compare?

What are some tax planning considerations & miscellaneous items?

What questions can we help with?

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WHAT WE’LL COVER TODAY

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• Elimination of ACA taxes – common theme between proposals of President Trump & House Blueprint (not in Framework)

• Accomplishing elimination of these taxes through health care reform would make easier path for tax reform efforts

• FY 2017 budget resolution passed to facilitate passage

WHAT’S HAPPENED SO FAR?Health care reform first

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WHAT’S HAPPENED SO FAR?

Significant tax reform developments

06.22.2016 04.26.2017 07.27.2017

House Blueprint released

President Trump’s guidelines released

Joint Statement on Tax Reform released

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09.27.2017 10.26.2017 11.02.2017 11.09.2017

Unified Framework released

House passed Senate’s budget

Tax Cuts and Jobs Act of 2017 (TCJA) introduced in the House

TCJA passed in House Ways & Means Committee | Senate bill introduced



By

Christmas

2017

TCJA passed in House | Senate version passed in Finance Committee

Amended version of TCJA passed in Senate

President’s desk for signature

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11.16.2017 12.02.2017

12.04 & 12.05

House & Senate voted to send TCJA to conference committee

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HIGHLIGHTS OF TAX BILLS COMPAREDBusiness

Proposal Current Tax LawHouse Bill

(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Corporate tax rate Top rate of 35 percentFlat rate of 20 percent (effective 01/01/2018)

Flat rate of 20 percent (effective 01/01/2019)

Pass-through tax rateIndividual rate on ordinary

income

25 percent rate applied to 30 percent of net active business income under

default provision(1)

Deduction of 23 percent of domestic qualified

business income (QBI) limited to 50 percent of W-

2 wages(2); expires after 12/31/2025

Alternative Minimum Tax 20 percent Repealed Retained

Personal service corporations

Flat rate of 35 percent Flat rate of 25 percent Flat rate of 20 percent

(1)Default provision treats remaining 70 percent as wage income subject to ordinary individual rates. This default categorization is not available to professional service firms. An alternative calculation based on actual level of capital investment is also available. A reduced rate is provided for small businesses

(2)Deduction does not apply to specified service businesses, except in case of taxpayer whose taxable income does not exceed $250,000 for single filers ($500,000 married filing jointly) with a phaseout beginning at the same levels over the next $50,000 ($100,000) of taxable income. QBI is all domestic business income other than investment income (except income from publicly traded partnerships which is eligible for inclusion), investment interest income (other than qualified REIT & corporate dividends), net capital gain, foreign currency gains, etc.

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Bonus depreciation

40, 30 & 20 percent bonus depreciation for qualifiedproperty in 2018–2020,

respectively; property must be new to qualify

100 percent through 2022for qualified property

placed in service after 09/27/2017(1); excludes

property used in regulated public utilities, real property

trade or businesses & property used in a trade or

business that has floor plan financing indebtedness

100 percent through 2022for qualified property

placed in service after 09/27/2017; 80, 60, 40 &

20 percent bonus depreciation for property

placed in service in 2023–2026, respectively;

excludes certain property used in regulated public

utility businesses & property used in a trade or

business that has floor plan financing

indebtedness; includes qualified film, television & live theatrical productions placed in service before

2023

Section 179 expensing

Up to $520,000; phaseout beginning at $2,070,000 of

assets placed in service

Up to $5 million; phaseout beginning at $20 million of assets placed in service;

provision set to expire 12/31/2022

Up to $1 million; phaseout beginning at $2.5 million of assets placed in service(2)

(1)Definition of qualified property expanded by removing requirement that original use begin with taxpayer (2)Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Cost recovery for residential rental & nonresidential real

property

27.5 years for residential rental property & 39 years

for nonresidential real property

Not addressed

25 years for both residential rental & nonresidential real property; 30-year

alternative depreciation system record period for residential real property

Like-kind exchanges

Deferral of gain permitted on like-kind exchanges of certain property held for

productive use in a trade or business or for investment

Limit deferral of gain on like-kind exchanges to real

property only

Limit deferral of gain on like-kind exchanges to real

property that is not held primarily for sale

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Interest expenseDeduction allowed for

interest expense

Deduction limited to 30 percent of entity’s adjusted

taxable income; excess carried forward up to five

years(1)

Deduction limited to business interest income,

floor plan financing interest & 30 percent of entity's

adjusted taxable income; excess carried forward

indefinitely(2)

Net operating loss (NOL)Carried back two years & carried forward 20 years

Deduction limited to 90 percent of taxable income;

no carryback; carried forward indefinitely with

carryforward amount adjusted by an interest factor to preserve value

Deduction limited to 90 percent of taxable income

for tax periods after 2017 & 80 percent for tax periods after 2022; no carryback;

carried forward indefinitely

Entertainment expense(3) Deduction limited to 50 percent of expense

No deduction No deduction

(1)Adjusted taxable income is taxable income without regard to business interest expense, business interest income, net operating loss (NOL), amortization, depreciation & depletion. This deduction is not limited for any taxpayer that meets $25 million gross receipts test, is a regulated public utility business or a real property business(2)Adjusted taxable income is taxable income without regard to items not properly allocable to a trade or business, any business interest expense or business interest income, the 23 percent pass-through income deduction & any NOL deduction. Interest deduction is not limited for any taxpayer that meets a $15 million gross receipts test, is a regulated public utility business (including electric cooperatives) or a real property business. Farming businesses may elect not to be subject to limitation provided they use ADS method to depreciate farming property with recovery period of 10 years or more(3)Includes entertainment, amusement or recreation activities; does not include qualified meal expenses

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Dividends received deduction

70 & 80 percent for any dividend received from

corporations owning <20 percent or ≥20 percent of

stock of another corporation, respectively(1)

Deduction amounts reduced to 50 & 65 percent

for corporations owning <20 or ≥20 percent of


Deduction amounts reduced to 50 & 65 percent

for corporations owning <20 or ≥20 percent of


Deduction for domestic production activities

Up to 9 percent for domestic production

activities

Repealed (effective for taxable years beginning

after 12/31/2017)

Repealed (effective for taxable years beginning

after 12/31/2018 for corporations; 12/31/2017

for other taxpayers)

Research & development credit

Tax credit available to businesses that develop

new or improved products or processes

Explicitly retained(2) Explicitly retained(3)

(1)Deduction is 100 percent of dividend received where member of the same affiliated group. (2)For tax periods beginning after 12/31/2022, certain research & experimentation expenses, including software development costs, would be required to be capitalized & amortized over a five-year period. For foreign research projects, this amortization period Increases to 15 years(3)For tax periods beginning after 12/31/2025, certain research & experimentation expenditures, including software development costs but excluding land acquisition & improvement costs & mine (including oil & gas) exploration costs, would be required to be capitalized & amortized over a five-year period. For foreign research projects, this amortization period increases to 15 years. Upon retirement, abandonment or disposition of property, any remaining basis would continue to be amortized over remaining amortization period.

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Low income housing credit

Tax credit available to owners of qualified

residential rental buildings in low-housing projects

Explicitly retained Explicitly retained

Work opportunity tax credit

Nonrefundable tax credit for 40 percent of qualifying

wages paid to certain employees who qualify as

members of disadvantaged groups

Repealed Not addressed

Employer credit for paid family & medical leave

Not addressed Not addressed

Tax credit available to eligible employers of 12.5 percent of wages paid to

qualifying employees during any period such

employees are on family & medical leave if payment rate under program is 50

percent of wages normally paid(1)

(1)Credit increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which rate of payment exceeds 50 percent. Credit is effective for wages paid in tax years beginning after 12/31/2017 & before tax years beginning after 12/31/2019

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Qualified opportunity zones

Not addressed Not addressed

Deferral/permanent exclusion of capital gains

reinvested in a corporation or partnership that invests at least 90 percent of its

assets in qualified opportunity zone property,

which are targeted at certain low-income

community population census tracts to be

established in each state

Unused business credits

Deduction allowed for unused business credits;

carried back one year; carried forward 20 years


Deduction for settlements paid in

connection with sexual harassment or sexual

abuse

Generally deductible as ordinary & necessary trade

or business expenseNot addressed

No deduction for settlement, payout or

attorney fees related to sexual harassment or

sexual abuse if payments subject to a nondisclosure

agreement

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Required application of Section 263A uniformcapitalization rules to

inventory

Gross receipts > $10million for property

acquired for resale; no threshold for manufactured

property

Gross receipts > $25 million for property

acquired for resale or manufactured property

Gross receipts > $15 million for property

acquired for resale or manufactured property

Required use of percentage-of-

completion method for long-term contracts

Gross receipts > $10 million



Cash method of accounting

Allowed for C corporations that do not exceed $5

million gross receipts test

C corporations with less than $25 million of gross

receipts

C corporations with less than $15 million of gross

receipts

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Untaxed accumulated foreign earnings

Not addressed

14 percent rate for cash/cash equivalents, 7

percent otherwise, payable over eight years

14.5 percent for cash/cash equivalents, 7.5 percent otherwise, payable over

eight years

Future foreign earningsWorldwide income tax based on residence &

source

Territorial system with base erosion provisions(1)

Territorial system with base erosion provisions(1)(2)

Interest-charge domestic international sales

corporation (IC-DISC)

Taxation on profits generated by small U.S. manufacturers from U.S. manufactured products sold overseas can be deferred indefinitely &

reinvested into the business

Retained Retained

(1)100 percent of foreign-sourced portion of dividends paid by foreign corporation to U.S. corporate shareholder owning 10 percent or more of foreign corporation’s stock exempt from U.S. taxation. No foreign tax credit or deduction allowed for any foreign taxes paid or accrued with respect to any exempt dividend(2)Provides an election to preserve NOLs & coordinate NOL, overall foreign loss & foreign tax credit carryforward rules upon transition

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HIGHLIGHTS OF TAX BILLS COMPAREDIndividual


(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Individual rates on ordinary income

Seven brackets with top rate of 39.6 percent*

Four brackets of 12, 25, 35 & 39.6 percent*

Seven brackets with top rate of 38.5 percent*^

Capital gains rateTop rate of 20 percent* No change No change

Nonpassive losses from flow-through entity

Deductible to extent sufficient tax basis exists

No change

Nonpassive losses limited to $250,000, $500,000 for married filing jointly (MFJ);

excess loss treated as NOL & carried forward

Carried interest

Capital gains rate after one-year holding period for

interests received in exchange for performance

of services

Capital gains rate after three-year holding period

Capital gains rate after three-year holding period

Alternative Minimum Tax

28 percent top rate; exemption of $53,900 for single filers ($83,800 for

MFJ)

Repealed(1)

28 percent top rate; exemption of $70,300 for

single filers ($109,400 MFJ)

*Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000^Expires after 12/31/2025, except amounts would continue to be indexed for inflation using chained measurement of the Consumer price index where applicable(1)Taxpayers with AMT credits going into 2018 would be able to claim 50 percent of those credits per year from 2019 to 2021 with balance in 2022

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Standard deduction$6,500 for single filers

($13,000 MFJ)(1)

$12,200 for single filers ($24,400 MFJ)

$12,000 for single filers ($24,000 MFJ)^

Personal exemption$4,150(1) Repealed Repealed^

Child tax credit$1,000; phaseout at

$75,000 for single filers ($110,000 MFJ)

$1,600 ($1,000 refundable); phaseout at $115,000 for single filers

($230,000 MFJ)

$2,000 ($1,000 refundable); phaseout

beginning at $500,000 for single filers ($1 million

MFJ)^

Family flexibility credit Not addressed

$300 credit for taxpayer & spouse who are neither a

child nor a nonchild dependent (through 2022); phaseout at $115,000 for

single filers ($230,000 MFJ)

$500 nonrefundable credit for dependents other than

qualifying children; phaseout at $250,000 for

single filers ($500,000 MFJ)^

^Expires after 12/31/2025, except amounts would continue to be indexed for inflation using chained measurement of the consumer price index where applicable(1)Subject to phaseout based on adjusted gross income (AGI) under current law. This limitation would be repealed under both the House & Senate bills, except would revert back to its form before 1/1/2018 after 12/31/2025 under the Senate bill

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Affordable Care Act

individual mandate

Individuals not covered by health plan that provides at

least minimum essential coverage must pay individual shared

responsibility payment(1)

Not addressed

Individual shared responsibility payment

reduced to zero for months beginning after 12/31/2018

Exclusion for gain from sale of principal

residence

Exclusion up to $250,000 for single filers ($500,000 MFJ) of gain from sale of principal residence where home used as principal

residence for at least two of previous five years

Require home to be principal residence for at

least five of previous eight years; phaseout for higher-

income taxpayers

Require home to be principal residence for at

least five of previous eight years^

Discharge of certain student loan indebtedness

Generally included in taxable income unless

certain exceptions apply

Income from discharge of student loan debt on

account of death or total & permanent disability of student excluded from

taxable income

Income from discharge of student loan debt on

account of death or total & permanent disability of student excluded from

taxable income

^Expires after 12/31/2025, except amounts would continue to be indexed for inflation using chained measurement of the Consumer price index where applicable(1)Tax imposed for any month an individual does not have minimum essential coverage unless an exception applies. Tax for any calendar month is one-twelfth of tax calculated as an annual amount. Annual amount is equal to greater of flat dollar amount (lesser of sum of individual annual dollar amounts for members of taxpayer’s family or 300 percent of adult individual dollar amount of $695 for 2018) or excess income amount (2.5 percent of excess of taxpayer’s household income for taxable year over threshold amount of income for requiring taxpayer to file income tax return)

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Recharacterization of certain IRS & Roth IRA

contributions

Contributions to a traditional IRA permitted to

be recharacterized as contribution to a Roth IRA

or vice versa; permits recharacterization of

conversions

Repealed Repealed

Education tax credits

Three higher education tax credits provided: American

Opportunity Tax Credit (AOTC), Hope Scholarship Credit & Lifetime Learning

Credit

Three credits consolidated into one enhanced AOTC providing 100 percent tax credit for first $2,000 of

qualified education expenses & 25 percent for next $2,000, a lower $500

refundable portion & an additional year of eligibility

Elementary & secondary school expenses up to

$10,000 treated as qualified expense for Section 529 plans(1)

(1)Reverts back to its form before 01/01/2018 after 12/31/2025

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HIGHLIGHTS OF TAX BILLS COMPAREDIndividual – Above-the-line deductions


(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Above-the-Line Deductions

Educator expense

Deduction up to $250 ($500 MFJ) for qualified

expenses paid by qualified educators

Repealed

Deduction up to $500 ($1,000 MFJ) for qualified expenses paid by eligible educators; expires after

12/31/2025

Qualified moving expenses

Deduction for expense paid for moving at least 50 miles in connection with a

job or business

Repealed except for active-duty members of U.S. Armed Forces who

move pursuant to military order

Repealed(1)

Alimony paid

Deduction for qualifying amounts paid under a divorce or separation

instrument

Repealed (both deduction & income inclusion)

No change

(1)Reverts back to its form before 1/1/2018 after 12/31/2025

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HIGHLIGHTS OF TAX BILLS COMPAREDIndividual – Above-the-line deductions


(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Above-the-Line Deductions

Student loan interest deduction

Deduction for qualified student loan interest paid

during year for nondependent taxpayers

with AGI less than $80,000 single ($160,000 MFJ)

Repealed No change

Tuition & feesDeduction for qualified

tuition & fees paid during year


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HIGHLIGHTS OF TAX BILLS COMPAREDIndividual – Itemized deductions


(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)

Itemized Deductions*

Medical & dental expense

Deduction for out-of-pocket expenses paid or incurred

during year to extent expense exceed 10

percent of AGI

Repealed

For 2017 & 2018, deduction for out-of-pocket expenses paid or incurred

during year to extent expenses exceed 7.5

percent of AGI; repealed thereafter

State & local income tax expense

Deduction for income or sales taxes paid or

incurred during yearRepealed

Repealed except where deductible on Schedules

C, E or F(1)

Real estate & personal property tax expense

Deduction for taxes paid or incurred during year

Deduction for real property tax not related to trade or

business capped at $10,000; no deduction for

personal property tax except related to trade or

business

Deduction for real property tax not related to trade or

business capped at $10,000; no deduction for

personal property tax except related to trade or

business(1)

*Subject to phaseout based on adjusted gross income (AGI) under current law, i.e., the “Pease” limitation. This limitation would be repealed under both the House & Senate bills, except would revert back to its form before 01/01/2018 after 12/31/2025 under the Senate bill(1)Reverts back to its form before 01/01/2018 after 12/31/2025

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)


Home mortgage interest expense

Deduction for mortgage interest paid or incurred on

up to $1 million of acquisition indebtedness & $100,000 of home equity

indebtedness

Deduction limited to interest paid on first

$500,000 of indebtedness(1); no

deduction allowed for interest paid on second homes & home equity

loans; phaseout repealed

Modified to eliminate deduction for interest paid

on home equity loans;phaseout repealed(2)

Gifts to charity

Deduction for charitable contributions made during year; deduction for cash

contributions limited to 50 percent of AGI

Deduction for cash contributions modified to increase AGI limitation to 60 percent; deduction for amounts paid to colleges

for right to purchase tickets for athletic events

eliminated

Deduction for cash contributions modified to increase AGI limitation to

60 percent(2)(3)

*Subject to phaseout based on adjusted gross income (AGI) under current law, i.e., the “Pease” limitation. This limitation would be repealed under both the House & Senate bills, except would revert back to its form before 01/01/2018 after 12/31/2025 under the Senate bill(1)Would apply for homes purchased after 11/2/2017. Interest deductions for existing mortgages would remain unchanged(2)Reverts back to its form before 01/01/2018 after 12/31/2025(3)Would repeal exception to contemporaneous written acknowledgment requirement for contributions of $250 or more when done organization files required return effective for contributions made in tax years beginning after 12/31/2016

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(Passed 11/16/2017)

Senate Bill

(Passed 12/02/2017)


Personal casualty & theft losses

Deduction for casualty & theft losses incurred

Repealed except special above-the-line deduction for

losses provided withinDisaster Tax Relief &

Airport and Airway Extension Act of 2017

Eliminated except for losses incurred within a

major disaster area under the Robert T. Stafford

Disaster Relief & Emergency Assistance Act

of 2016(1)

Miscellaneous itemized deductions subject to 2

percent of AGI floor

Deduction for tax preparation fees,

unreimbursed employee expenses & other

miscellaneous items paid during year to extent they exceed 2 percent of AGI

Tax preparation fees & unreimbursed employee expense repealed; other miscellaneous itemized

deductions not addressed

Repealed(1)

*Subject to phaseout based on adjusted gross income (AGI) under current law, i.e., the “Pease” limitation. This limitation would be repealed under both the House & Senate bills, except would revert back to its form before 01/01/2018 after 12/31/2025 under the Senate bill(1)Reverts back to its form before 01/01/2018 after 12/31/2025

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TAX PLANNING FOR TAX REFORMIndividual brackets

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TAX PLANNING FOR TAX REFORMIndividual brackets

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TAX PLANNING FOR TAX REFORMDeduction/credit/

exemption examples

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TAX PLANNING FOR TAX REFORMDeduction/credit/

exemption examples

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TAX PLANNING FOR TAX REFORMWhat are some tax planning considerations?

Year-end planning environment is dynamic & uncertain

Taxpayers who expect tax reform & tax rates to decline may consider tax planning strategies to accelerate deductions & defer income

Maintaining flexibility will be key in implementing a strategy for possible tax reform as more details are revealed

The potential tax benefit of any planning strategy implemented should not overshadow the business & economic effect

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TAX PLANNING FOR TAX REFORMWhat are some year-end strategies for individuals?

Evaluate timing of when you receive income

Recognize losses & defer gains

Evaluate IRA & annuity distributions

Evaluate Roth conversions & recharacterizations

Consider impact of the AMT

Evaluate timing of your itemized deductions

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TAX PLANNING FOR TAX REFORMWhat are some year-end strategies for businesses?

Choice of entity considerations

Accounting method changes

Cost segregation studies

Capital improvement planning

Charitable contributions

International effect & E&P studies

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MISC. ITEMS

Audit trends & experiences

Federal notices

ACA compliance notices

Arkansas notices

Identity theft

Other items

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Keep Up with What’s Next

• BKD Tax Reform Resource Center

• bkd.com/taxreform

• Simply Tax podcast

• bkd.com/simplytax

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Questions?Ernie Skyrme, CPA

[email protected]

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The information contained in these slides is based on

data available as of the date of the presentation & is not

to be considered as tax advice. Applying specific

information to your situation requires careful

consideration of facts & circumstances. We are under no

obligation to update these slides if changes occur.

Consult your BKD advisor before acting on any matters

covered

Thank You!

tax reform – individual & business considerations€¦ · proposal current tax law house bill...

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