Analysis of Winners and Losers in Tax Cuts and Jobs Act

Tax Cuts and Jobs Act

Who are the Winners and Losers?

Presented by: Timothy J. Sundstrom, CPA, CFP

Timothy J. Sundstrom CPA, CFP –

         “Some Call Me Tim”

Tim is a CPA and financial planner located in Broomall, PA (suburban

Philadelphia). He is the former president of the Pennsylvania Society of

Public Accountants and for the last 13 years has been a lecturer with

Thomson Reuters’ Gear Up Seminars and has authored several

publications concerning tax and financial planning. Tim is a current

member of the NSA tax committee.

Tim currently lives in Havertown, PA with his wonderful wife Carina,

and their brand new puppy Dixie.

When Tim is not working he enjoys reading, gardening, traveling and of

course walking the dog.

Tax Cuts and Jobs Act

Who are the Winners and Losers?

Learning Objectives:

Upon completion of this course, you will be able to:

•

Discuss the major changes to personal returns.

•

Explain the flow through deduction.

•

Discuss the major changes with regard to corporations.

Tax Cuts and Jobs Act

•

Signed into law  December 22, 2017

•

Most provisions begin in 2018 with some minor exceptions.

•

Most changes are temporary! Most expire after 12/31/25.

These changes I have labeled 2018 to 2025 .

•

Large use of Suspension- Personal exemptions, miscellaneous

itemized etc.

•

Already push back on SALT reduction-  Already proposals  to

restore deduction.

•

No Postcard.

Tax Cuts and Jobs Act

•

Warning: 

It is impossible to cover ever aspect of the Act in 4

hours – or for 8 hours for that matter.

•

We all need to take the time to really understand these rules.

Quick Review- of Individual Changes

•

New income tax rates and brackets

•

Standard deduction increased

•

Personal exemptions suspended

•

New Chained CPI changes

•

Kiddie tax has been modified

•

AMT was modified but retained

•

Shared responsibility penalty set to “zero”

Quick Review- of Individual Changes

•

State and local taxes caped at $10,000.

•

Elimination of the home equity provision

•

Modification of the Mortgage limit

•

Changes in contributions including college athletic

seating rights

Quick Review- of Individual Changes

•

Medical thresholds reduced- 7.5%

•

Alimony deduction suspensions for agreements after

12/31/18

•

Miscellaneous 2% itemized suspended

•

PEASE limitation suspended

•

Qualified Bicycle commuting suspended

•

Moving expenses and reimbursements suspended-

except members of armed forces

Quick Review- of Individual Changes

•

Student loan discharge added for death or disability

•

Deduction for living expenses for Congress eliminated

•

Combat zone treatment extended to Sinai Peninsula

•

Child tax Credit increased to $2,000

•

Non-Child Tax Credit

•

Personal Casualty losses suspended- Disaster losses

allowed

Quick Review- of Individual Changes

•

New disaster relief provisions 2016

disasters for years 2016/2017.

•

Repeal of the re-characterization of Roth

conversions

•

Length of service award programs for

public safety volunteers increased to

$6,000.

•

Extended rollover for plan loans.

Quick Review of Business Changes

•

New limit on excess business losses

•

New holding period for carried interest-

partnerships

•

Self-created patents, inventions, designs, formulas,

are no longer capital assets.

Quick Review of Business Changes

•

Flat 21% corporate tax rate- no PSC rate!

•

Corporate AMT repealed

•

Reduction in the dividends received deduction

percentage

•

Code Sec. 179 increased to $1,000,000  with

acquisition limit of $2,500,000.

•

Expanded use of 179, bonus depreciation and 15

year life changes for qualified improvement

property.

Quick Review of Business Changes

•

100% Bonus for property placed in service after

9/27/17- can be used for both new and used

property.

•

New Interest limits – will not affect businesses

under $25 million in gross receipts.

•

Net Operating losses- 2 year carryback rule is

repealed.

Quick Review of Business Changes

•

Domestic production deduction repealed- New flow

through deduction!

•

Like-kind exchanges limited to real estate

•

Five-year write off of specified R&E expenses

•

Entertainment deductions no longer allowed

•

In-house cafeteria on premise now only 50%

deductible

Quick Review of Business Changes

•

New Credit for paid family leave

•

Changes in Employee achievement awards- no cash,

gift cards, vacations, tickets.

•

Limitations on executive compensation

•

No deduction for lobbying, sexual harassment non

disclosure

Quick Review of Business Changes

•

Cash method up to $25 million in average gross

receipts

•

No inventory or UNICAP up to $25 million in average

gross receipts

•

Small Contractor exceptions to PCM - $25 million in

average gross receipts

•

New Pass-through deduction

Quick Review of Business Changes

•

Repeal of the technical termination of partnership

provisions

•

New look-through rules for foreign partners on sale of

partnership interests

•

Changes in “substantial built-in loss’ revised

•

Electing Small Business Trust(ESBT) modified to allow

for a nonresident alien as potential beneficiary

•

New changes for S Corps revoking  S Election in favor of

C Corporation.

Quick Review of Other Provisions

•

Estate and gift tax exemption increased to $10,000,000

indexed

•

Luxury automobiles limits increased

•

New farm equipment is 5 year property

Proposals that Did Not Make it (Not all inclusive)

–

The elimination of estate tax after 2023

–

The complete elimination of AMT for individuals

–

Increasing period for ownership and occupancy to exclude gain on

sale of a residence

–

Extending the American Opportunity Tax Credit (AOTC) to 5 years

–

Increasing deduction for teachers to $500

–

Inclusion in income tuition reduction programs

–

Repeal of exclusion of interest from US Bonds used for higher

education

–

Repealing deduction for student loan interest

–

Termination of contributions to medical savings accounts

–

Eliminating credit for plug-in electric vehicles

–

Repealing completely Schedule A deduction for medical expenses

–

Repeal of employer provided child care credit

–

Repeal of Work Opportunity Credit

How Long Will It Last?

•

Expiration of Provisions After 8 Years and the Byrd Rule

•

Most Individual Provisions Expire After 2025

–

New Rates and Brackets        

Increased Standard Deduction

–

Suspended Exemptions

Child Credit Increase

–

Non-child Dependent Credit

60% of AGI Charity

–

SIT Limit to $10K

Mortgage Debt $750K Limit

–

Home Equity Suspended

Business Loss Limitations

–

Casualty and Theft Losses

Gambling Expense Limitations

–

Moving Expenses 

Qualified Bicycle

Reimbursements

–

Increased AMT Exemption

Increased ABLE contributions

–

Savers Credit and ABLE

Student Loan Discharges

–

Doubled Estate Tax Exemption 

 QBID

–

Disaster Losses & Standard Deduction

The Form 1040

The Form 1040

Schedule 1- Additional Income and Adjustments to

Income

Schedule 1- Additional Income and Adjustments to

Income

Schedule 2- Tax

Schedule 3- Nonrefundable Credits

Schedule 4- Other Taxes

Schedule 5- Other Payments and Refundable Credits

Schedule 6- Foreign Address, Third Party Designee

The Basic 1040

Gains

•

Lower ordinary tax rates

•

Larger standard deductions

•

Child Tax Credit doubled

•

Improved AMT Structure

•

Back to 7.5% for medical

expenses

Loss

•

Personal Exemptions

suspended

•

SALT Limited

•

Casualty on for disaster

•

2% Miscellaneous

itemized deductions

suspended

Single Tax Brackets

Joint and Surviving Spouse Returns

Up to 32% Bracket Tax Table Aligns

2018 –All rates starting in 2018 are in line up to the

32% bracket.

Are We Going to File More MFS Returns?

The Law did not change any of the following MFS

negatives including but not limited to:

–

One spouse itemizes the other must also.

–

Taxpayer can only deduct expenses actually paid by

them- Community state rules differ.

–

Credits not available such as child care, adoption,

education and earned income credit.

–

IRC 121 – is $250K each rather than a total $500K

Are We Going to File More MFS Returns?

The Law did not change any of the following MFS

negatives including but not limited to:

–

Inability to offset one spouse passive income against

the other’s passive loss.

–

SS provisional income for 85% is “zero” if the

taxpayers lived together

–

IRA deduction and Roth eligibility phase out at

$10,000.

–

The SALT Limitation is $5,000

Head of Household Rates still better Up to 12%

Bracket

Head of Household Rate

Head of Household

•

New Law: 

For years beginning after 12/31/17- due diligence

requirements are imposed on returns taking the Head of

Household Status.  (Code Sec 6695(g))

Head of Household

Head of Household

Standard Deduction

Alternative Minimum Tax (2018-2025)

•

AMT is retained by the exemption amounts are increased.

42

Capital Gain Rates

Capital Gain Rate Structure

•

Refers to Maximum 0% and 15% amounts.

•

The  3.8% Net Investment Income Tax (IRC 1411) was retained.

Child Tax Credit/ Family Credit- (2018 -2025)

Old Law: 

Child Tax Credit was $1,000 for each

qualifying child under age 17 the amount was subject

to a phase out.

New Law:  

Provides an Enhanced Child Credit

•

Credit increased to $2,000 with $1,400  refundable.

•

Non refundable credit of $500 for non-child dependent

•

Child must have a SSN.

Enhanced Child Tax Credit and New Family Credit

•

Phase-out

–

All above credits subject to phase-out

–

Phase-out remains at $50 for each $1,000 or part thereof as AGI

exceeds following thresholds:

 Phase outs are not adjusted for inflation.

Maidless Couple - 5 Children both CTC

Qualifying and Non-qualifying

Mademores with 5 Children Eligible and Not Eligible

Kiddie Tax

Old Law: 

The net unearned income of a child was

taxes at the parent’ rates once the unearned income

exceeded $2,100. The provision applied to any child

under age 19 and full-time college students under

age 24.

Kiddie Tax

New Law:

 For years beginning after 12/31/17, the

child’s earned income will be taxed at the single

individual rates, the unearned income will be taxed

at the trust and estate rates.

Note: 3.8% NIIT also starts at $12,500- Consider 529

Plans!

Kiddie Tax

•

Jason is now 13 has $3,500 in unearned income.  His parents

file a joint return have taxable income of $300,000 and were in

the 33% bracket for 2017. How will Jason’s kiddie tax bill

change between 2017 and 2018?

Itemized Deductions

PEASE PHASE OUT PHASED OUT (2018-2025)

Old Law: 

Taxpayers who were over the threshold would have

itemized deductions reduced by 3% of the taxpayer’s AGI over

the threshold.  Reduction could not be greater than 80%.

New Law: 

PEASE limitation is suspended

Medical Expenses (2017-2018)

•

Old Law: 

Medical was deductible to extent it exceeded 10%

of AGI.

•

New Law: 

For tax years beginning after 12/31/16 and

ending before 1/1/19  the threshold is lowered to 7.5% of

AGI.

–

Rule limiting AMT medical to 10% does not apply.

•

Yes this means in 2019 we go back to 10%

Itemized Deductions

State and Local Taxes – (2018 - 2025)

•

Taxpayer can claim up to $10,000 ($5,000 MFS) for the

aggregate of:

–

State and local property taxes (not related to trade or

business) and

–

State and local income taxes.

–

Sales taxes if elected.

State and Local Taxes – (2018 - 2025)

•

This does not affect taxes claimed on for trade,

business or production of income.  Rental

property taxes claimed on Sch. C or E still okay.

•

Prepayment provision- could not prepay 2018

state and local income taxes in 2017.

–

You could however pay your 2017 estimates

by 12/31/17.

Observation- Other taxes are below the line

•

Other taxes – line 6 is after the $10,000 SALT Limit

•

Other taxes include

–

Foreign tax deduction – in lieu of credit

–

Mandatory contribution to Alaska, California, New

Jersey, or PA unemployment fund.

–

Mandatory contribution to Family Leave Insurance –

NJ and CA again!

–

Local Services Tax (LST)- Pa once again!

Mortgage Interest-Acquisition indebtedness

Acquisition Debt is debt used to buy, build or

substantially improve a home Substantial improvements

are those which:

–

Add value to the home

–

Prolong useful life or

–

Adapt your home to new uses

•

When refinancing, the new mortgage qualifies as

acquisition debt up to the amount of the balance of

acquisition debt of the old mortgage just before

refinancing.

Mortgage Interest Deduction – (2018 – 2025)

•

Prior Law

:

•

Rev Ruling 2010-25, If debt incurred to acquire a home

exceeds $1,000,000 excess can qualify as home equity

debt up to $100,000

Even if there is no separate home equity loan

Thus the limit to acquire a home was $1,100,000

•

Note the home equity provision and loans on transitory use

property(boats, travel trailers) did not qualify for AMT

purposes.

Mortgage Interest

Home Equity Debt

•

A mortgage that is secured by your home

•

It does not matter how the proceeds are used

Warning: 

These are tax definitions not bank products.

-Mortgage to payoff credit cards would be considered

home equity

-A bank home equity loan used to substantially improve

the property is “acquisition indebtedness”.

Mortgage Interest Deduction – (2018 – 2025)

•

Prior Law:  

Taxpayer could deduct interest on

acquisition indebtedness of up to $1,000,000

and home equity interest (not used to buy, build

or improve) on a loan up to $100,000

.

Mortgage Interest Deduction – (2018 – 2025)

New Law:

–

Interest on the home equity loan has been

suspended. No longer deductible!

–

Interest on home acquisition indebtedness of

up to $750,000($375,000 MFS).

–

If indebtedness is incurred before 12/15/17

retains $1,000,000 limit.

–

After 2025, the cap reverts to $1,000,000.

Mortgage Interest

Example:

 FMV

Mortgage

Purchased new home

$400,000

$375,000

Ten years later

  600,000    

  175,000

Refinanced – Cash taken out

  400,000

New Mortgage after refinance

               575,000

Used as follows:

•

To improve home

                         50,000

•

To buy a rental prop

                         50,000

•

To buy Facebook stock

              25,000

•

To buy personal autos and speed boat     275,000

Mortgage Interest

    Allocate Interest on Mortgage as Follows:

     Acquisition Debt Before Refinance 

            $175,000

     Home Improvements

50,000

To Schedule A 

                          225,000

Investment Interest – To Form 4952   

     25,000

Rental Property – To Schedule E

     50,000

Consumer Debt – Not Deductible

275,000

Total

$575,000

Mortgage Interest

Charitable Deductions (2018 -2025)

•

New Law: 

Increases the AGI limit for public charity

contributions from 50% to 60%.  Exceptions to the reporting

requirement for contributions have been repealed.

•

Old Law: 

Contributions to college or university for which the

taxpayer received the right to buy tickets for seating at an

athletic event were deductible.

•

New Law: 

No deduction for contribution if the taxpayer

receives a the right to purchase tickets to athletic events

(Code Sec. 170(I)(1)).

Schedule A- 2018

Personal Casualty Losses (IRC 165(h)(5)) (2018 –

2025)

•

Old Law: 

losses not connected with a trade or

business where deductible as personal casualty

losses from fire, storm, shipwreck, other casualty

or theft.

•

New Law: 

Personal casualty and theft losses are

deductible only to extent attributed to a

federally declared disaster

.  Retains $100 and

10% income.

•

Note: 

There is special relief for 2016 disasters.

Disaster Losses

TCJA: For 2016 and 2017 for net disaster losses

from 2016 disaster areas.

•

Retroactively removes the 10% AGI threshold in

2016 and 2017 to net disaster losses from 2016

disaster areas. (TCJA 1801.)

•

Raises the floor from $100 to $500

Disaster Losses- Example

Old Rules:

In 2017, T has $100,000 of AGI. He has a

personal casualty loss (unrelated to any net disaster

losses) of $1,000 and a net disaster loss (relating back to

a 2016 disaster area) of $5,000. Without the above

provision, because of the $100 per-casualty floor (see

¶ 1802

 for Tax Cuts and Jobs Act change) the $1,000 loss

would be reduced to $900, and the net disaster loss

would be reduced to $4,900, for a total of $5,800. But

because $5,800 is less than 10% of the taxpayer's AGI, no

deductible loss would be allowed.

Disaster Losses- Example

•

TCJA: the personal casualty loss is reduced by

$100 to $900 and the net disaster loss is reduced

by $500 to $4,500 (see 

¶ 1802

). The deductible

loss allowed is (1) $4,500 plus (2) the excess of

$900 (the personal casualty loss reduced by the

net disaster loss) over $10,000 (10% of AGI).

Since $900 is less than $10,000, (2) is $0. So the

total loss deduction allowed is $4,500.

Net Disaster Loss- Enhanced Standard Deduction

New Law:  

For Net Disaster Losses from 2016 disaster areas in

2016 and 2017

•

Standard deduction is increased by the disaster loss

•

The portion allowed is allowed also for AMT purposes

Observation: This is to help non-itemizers in cases of Federally

declared disasters.

Job Expenses, Miscellaneous Deduction and other

Miscellaneous Deductions- Schedule A -2017

Other Itemized Deductions- 2018

Miscellaneous 2% Itemized Deductions –(2018-2025)

•

Old Law: 

Allowed miscellaneous items to be deducted in

excess of 2% of AGI. This included unreimbursed employee

business expenses, vehicle expenses of rural mail carriers,

investment expenses, tax fees, hobby expenses.

•

New Law: 

Miscellaneous itemized deductions are suspended

for 2018 to 2025.

•

Observation: 

Miscellaneous deductions not subject to 2%

remain unaffected by this change.  Gambling losses, income

repayments in excess of $3,000.

2% Miscellaneous – No Longer Deductible

•

Appraisal fees-

casualty/charity

•

Tax preparation

•

Safe Deposit

•

Employment Related

education

•

Union/Prof Dues

•

Investment expenses

•

Emp. business expense

•

Repayments $3,000 or

less

•

Safety clothing

•

Custodian fees

•

Cost of new job

•

Hobby expenses

•

Losses on 529 plans

•

Educator expenses

•

Small tools

•

Subscriptions

•

IRA losses

The Union Workers- One Non-Child Dependent

With the reduction in the

SALT and loss of 2% Misc.

taxpayers are no longer

itemize.

Taxpayers might want to

consider bunching

deductions such as

charitable contributions.

Other Miscellaneous Deductions- Still available

•

Federal estate tax on

IRD

•

Unrecovered

investment in annuity

•

Impaired work

expenses- disability

•

Loss from other

activities

•

Gambling losses to

extent of winnings

•

Casualty theft losses

from income

producing property

•

Losses from Ponzi-

type investment

schemes.

Gambling Loss Limitation –Professional Gamblers-

(2018 -2025)

Old Law: 

non-wagering expenses such as travel, entertainment

were not limited to the extent of gambling income.  Accordingly,  a

professional gambler could report a loss on schedule C for these

other items.

New Law:  

For purposes of the limit on wagering losses, the term

“losses from wagering transactions” includes any deduction

otherwise allowable under the Code incurred in carrying on any

wagering transaction.

Moving Expenses (2018-2025)

New Law:

•

Act temporarily suspends the moving expense

deduction for tax years, except in the case of a member

of the Armed Forces of the United States on active duty

who moves pursuant to a military order and incident to

a permanent change of station.

•

Act also suspends the exclusion for qualified moving

expenses.

Alimony – Get Divorced Now

Old Law: 

Alimony or separate maintenance were

deductible to the payer and includable in income to the

payee.

New Law: 

For divorce or separation agreements

executed after 12/31/18- the alimony deduction and

income inclusion do not apply. Code Sec 71(b)(2).

•

If the agreement was executed before 12/31/18 but

later modified, this provision will apply if expressly

provided for in the amendment.

Achieving Better Life Experience (ABLE)

Old Law: 

ABLE Accounts are savings accounts for children

who are either  permanently physically or mentally

disabled before age 26.

•

The account can be funded at any age provided the

beneficiary meets the qualifications.

•

Not Taxable if used for qualified

•

IRC 529A- operates similar to a 529 plan

•

Only one plan per person

•

Contribution up to the gift limit -$15,000 in 2018

($14,000 in 2017).

Achieving Better Life Experience (ABLE)

Qualified expenses include: education, housing,

transportation, employment training and support,

assistive technology, personal support service,

health care expenses, financial management,

administrative services, oversight and monitoring,

funeral and burial expenses of the beneficiary.

As long as total asset is $100,000 or less, not

treated as an asset for Medicaid purposes.

Achieving Better Life Experience (ABLE)

New Law:

•

Additional contribution after the general limit has been

reached of the lesser of:

–

the beneficiary’s compensation or

–

Federal poverty level for one-person household.-

2018 continental US -$12,060.

•

The max for 2018 would be $27,060.

Achieving Better Life Experience (ABLE)

New Law:

•

The 

60 day rollover from 529 plan accounts to ABLE

Accounts

–

Tax free rollover counts as part of the annual

$15,000.

–

Tax free rollovers from an other ABLE account do

not count against the limit.

Achieving Better Life Experience (ABLE)

New Law:

–

The tax free rollover is allowed if rolled over to

an ABLE account of:

•

Same beneficiary or

•

Member of the family of a designated

beneficiary.

–

This provision does not apply to transfers after

12/31/25.

Achieving Better Life Experience (ABLE)

New Law:

•

Savers credit may be claimed for contributions to

ABLE. Max credit is $1,000.

529 Plan Changes- Distributions after 12/31/17

Old Law:  

529 or QPT programs always could be used for

“qualified higher education expenses”.

New Law: 

Qualified higher educational expenses include

up to $10,000 per year for elementary and secondary

school tuition including public, private and religious

schools.

•

This is a per beneficiary limit.

ROTH Recharacterizations

Old Law: 

Taxpayers who converted traditional IRAs to

ROTH IRAs were entitled to undue or recharacterize

the conversion as late as the extended due date for

the tax return.

New Law: 

For years beginning after December 31,

2017

•

The ability to recharacterize does not apply to

conversion to a ROTH IRA.

•

Recharacterization is still permitted for other IRAs.

Deductible IRA to non-deductible IRA.

Retirement Plan Disaster Relief

New Law:

•

Exception to 10% penalty 

for distributions made on or

after 1/1/16 and before 1/1/19 to and individual who

principal place of abode at any time during the calendar

year was located in a 2016 disaster area and who has

sustained an economic loss by reason of the events

giving rise to the Presidential disaster declaration.

•

Qualified disaster distributions is limited to $100,000.

•

Any amount included in income as a result of a qualified

2016/2017 disaster is included in income ratably over

the 3 year period beginning with the year of

distribution.

Retirement Plan Disaster Relief

New Law:

•

Any portion of the disaster distribution may at any time

during the 3 year period beginning on the date the

distribution was received can be recontributed to an

eligible retirement plan to which a rollover can be

made.

–

Any amount recontributed with in the 3 year period

is treated as a rollover and is not includable in

income.

Retirement Plan Disaster Relief

New Law:

•

Jim receives a qualified disaster distribution in 2016.

That amount is includable in income over the year of

distribution and the following 2 years.

•

In 2018, Jim recontributes the entire amount. He can

file an amended return for the prior year. No further

income is recognized.

Qualified Business Income Deduction (Flow-Through

Deduction)

Old Law: 

Provided for a domestic production deduction.

New Law:

•

Repeals the domestic production deduction

•

Provides a new Qualified Business Income

Deduction(QBDI)  for individuals.

New Deduction for Qualified Business Income for

Individuals

–

Generally a deduction of 20% of qualified domestic business

income from a sole proprietorship, partnership or S

corporation

–

The deduction reduces taxable income but not AGI

–

The deduction does not reduce SE income or the SE tax

–

Income and losses from more than one business are

combined to produce combined net qualifying business

income or loss

–

Net combined losses are carried forward and used to

reduce combined net qualifying income in subsequent years

New Deduction for Qualified Business Income for

Individuals

–

Qualified business income includes:

•

Income from self employment (Schedule C, F)

•

Income from S Corporations

•

Income from partnerships

•

Certain dividends of REITs

•

Patronage dividends – No Longer, Removed

in Reconciliation Bill

•

Qualified publicly traded partnership income

New Deduction for Qualified Business Income

Qualified business income does not include:

•

Dividends (other than REITs)

•

Interest income unless properly allocated to a

trade or business

•

Capital gains or losses (short and long term)

•

Commodities gains unless related to normal

course of business

•

Foreign currency gains unless related to normal

course of business

•

Payment for reasonable compensation received

from an S corporation

•

Guaranteed payments for services from a

partnership

Guaranteed Payments to Partners

•

Specified Businesses

Any trade or business involving in the performance of

services described in Code Sec. 1202(e)(3)(A) 

other

than engineering or architecture 

or which would be

so described if the term “employee owners” were

substituted for employees in that section (Code Sec.

199A(d)(2)(A)) or

–

Any trade or business which involves the

performance of services that consist of the

investing and investing management, trading or

dealing in securities described in Code Sec.

475(c)(2) .

Specified Service Business

•

 Fields of health, law, consulting, 

engineering,

architecture

, athletics, financial services, brokerage

services, or any trade or business where principal

asset is the reputation or skill of one or more

employees or owners.

–

Generally,  specified businesses are excluded from

the flow-through deduction.  However this exclusion

does not apply however if the taxable income is less

than the sum of the $157,500 ($315,000 MFJ) plus

$50,000 ($100,000 MFJ). (Code Sec 199A(d)(3)(A)(i)).

Specified Service Business

•

Observation: For Specified Service Business the

credit has completely phased at taxable income

of

–

$415,000 for joint ($315,000+ $100,000)

–

207,500 for others ($157,500 +$50,000)

Flow-Through Deduction

•

Qualifying property is tangible property of a character

subject to a Code Sec. 167 depreciation allowance that is:

–

held by, and available for use in, the qualified trade or

business at the close of the tax year (IRC.

199A(b)(6)(A)(i))

–

which is used at any point during the taxable year in

the production of qualified business income (IRC.

199A(b)(A)(ii), and

–

the depreciable period for which has not ended before

the close of the tax year. (IRC 199A(b)(6)(A)(iii)).

New Deduction for Qualified Business Income for

Individuals- 3 Limitations

First Limitation – Applies to all businesses-

Taxable income below threshold

–

QBID cannot be greater than 20% of taxable

income reduced by capital gain and qualified

dividends

–

Applies regardless of taxable income, W-2

wages or qualified property

New Deduction for Qualified Business Income for

Individuals- 3 Limitations

Second Limitation – Applies to non-specified

service businesses over threshold

–

QBID cannot be greater than 50% of W-2

wages or 25% plus 2.5% of qualified property

New Deduction for Qualified Business Income for

Individuals- 3 Limitations

Third limitation – Applies only to specified service

businesses over threshold.

–

QBID phases out as taxable income exceeds

certain thresholds

–

Applies regardless of W-2 wages or qualified

property

New Deduction for Qualified Business Income for

Individuals

–

The limitation phases in as taxable income increases by $50,000

($100,000 joint) over the above thresholds as follows:

$315,000 for married filing joint

$157,500 for any other filing status

1- Is taxable income <= $315,000 for Joint Return

($157,500 others)?

QBI Deduction Joint Return

•

QBID cannot be greater than 20% of taxable income

reduced by capital gain/qualified dividend

PLANNING TIP

: 

In the above examples, the taxpayers left some QBID on

the table because taxable income was lower than QBI. Taxpayers may

want to consider finding ways to increase taxable income (other than

with capital gain) to maximize their QBID.

In the last example, above, if the taxpayers had done a ROTH

conversion in the amount of $50,000, taxable income would have

increased to $260,000. After reducing taxable income by the net

capital gain of $60,000, the QBID is limited to 20% of $200,000 or

$40,000. No QBID is left on the table.

The taxpayer has converted $50,000 from a traditional IRA to a ROTH

and would pay income tax on only $40,000 ($50,000 ROTH conversion

less salvaged QBID of $10,000). Other methods of increasing taxable

income include, but are not limited to, deferring charitable

contributions and other deductions on Schedule A and foregoing

contributions to an IRA or other pension plan.

2 –(Taxable Income over Threshold)

Is this a Specified Business?

If “NO”

•

Second Limit Applies

•

Phase in of the wage and

property limit over

taxable incomes of:

–

$315,000- $ 415,000

Joint

–

 $157,500- $207,500.

Other

If “YES”

•

The third limit applies

•

QBI deduction will phase

out over taxable income

range

–

$315,000- $ 415,000

Joint

–

 $157,500- $207,500.

Other

•

No deduction once over

the limit.

Calculating the Second Limitation

–

Under the second limitation, QBID cannot exceed the greater

of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of

qualified property [IRC Sec. 199A(b)(2)(B)].

–

First calculate the amount of QBID at the beginning of the

phaseout range (taxable income of $315,000 for MFJ,

$157,500 for others).

–

Second, calculate the QBID at the end of the phaseout range

(taxable income of $415,000 for MFJ, $207,500 for others).

–

Third, determine the actual amount of phaseout depending on

how far the taxpayer is into the phaseout range.

Calculating the Second Limitation- Example

Tony and Peggy have taxable income of $355,000. Income

from the Sole-Proprietorship is $75,000. The business paid

$20,000 in wages and has no qualified property.

1-Calculate the amount at the beginning of the phase out

range

•

Lesser of :

–

20% of QBI $75,000 = $15,000 or

–

20% of Taxable income reduced for capital

gain/qualified dividend = $71,000

•

Therefore the amount at the beginning of the range is

$15,000

Calculating the Second Limitation- Example

Tony and Peggy have taxable income of $355,000. Income from the

Sole-Proprietorship is $75,000. The business paid $20,000 in wages

and has no qualified property.

2-

 Calculate the QBID at the end of the phaseout range (taxable

income of $415,000 for MFJ, $207,500 for others). Under the

second limitation, QBID cannot exceed the greater of 50% of W-2

wages or 25% of W-2 wages plus 2.5% of qualified property [IRC

Sec. 199A(b)(2)(B)].

•

50% of wages of $20,000 = $10,000.

•

Please note this cannot be larger than the 1

st

 limit of $15,000.

Calculating the Second Limitation- Example

Tony and Peggy have taxable income of $355,000. Income from the

Sole-Proprietorship is $75,000. The business paid $20,000 in wages

and has no qualified property.

                                             Phase Out Range- $100K

New Deduction for Qualified Business Income 2

Limitation

•

Applies to non-specified businesses

•

QBID cannot be greater than 50% of W-2 wages or 25%

plus 2.5% of qualified property once taxable income

exceeds thresholds

New Deduction for Qualified Business Income

for Individuals

•

Applies to non-specified businesses

•

QBID cannot be greater than 50% of W-2 wages or 25%

plus 2.5% of qualified property once taxable income

exceeds thresholds

New Deduction for Qualified Business Income for

Individuals- 3

rd

 Limit- Specified Business

•

Applies to specified service businesses

•

QBID phases out once taxable income exceeds

thresholds (regardless of W-2 wages and property)

Calculating the 3

rd

 Limitation- Example

Tony and Peggy have taxable income of $355,000. Income from the

Specified Service Sole-Proprietorship is $75,000. The business paid

$20,000 in wages and has no qualified property.

                                             Phase Out Range- $100K

New Deduction for Qualified Business Income for

Individuals

•

Applies to specified service businesses

•

QBID phases out once taxable income exceeds thresholds

(regardless of W-2 wages and property)

Illustration of the Loss Carryover

•

Example: Taxpayer has qualified business income of

$30,000 from Abiz and a qualified loss from Bbiz of

$50,000.

•

The taxpayer has no deduction for the year and has to

carryover the excess loss of $20,000 to the following year.

•

In the following year the taxpayer has qualifying income

from both businesses of $30,000 the deduction is reduced

by 20% of the $20,000 carryover.

Living Large in NJ

No- Service business no

flow through deduction

Yes- Business entitled to

flow through deduction

123

123

123

Entertainment

Old Law: 

No deduction was allowed for entertainment or

recreation unless the taxpayer established that the

expense was directly related to or associated with the

active conduct of the taxpayer’s trade or business.

New Law

: For amounts paid after 12/31/17, the law

repeals a deduction for entertainment, amusement or

recreational expenses that are directly related to or

associated with the active conduct of the taxpayer’s

trade or business(IRC 274(a)(1)(A)).

The Tax Cuts and Jobs Act repeals:

•

The rule that limited the deduction to the portion of an

item that met the "directly related to or associated

with" standard [IRC Sec. 274(a)(1) as amended by 2017

TCJA §13304(a)(1)(B)].

•

The rule that allowed a deduction for a club if a

taxpayer established that the facility was used primarily

for the furtherance of the taxpayer's trade or business

and that the item was directly related to the active

conduct of that trade or business [IRC Sec. 274(a)(2) as

amended by 2017 TCJA §13304(a)(1)(C)].

TCJA Changes

•

The Bottom Line for Entertainment

:  Generally,

entertainment expenses are completely nondeductible,

regardless of whether they are directly related to or

associated with a taxpayer's business, unless it meets

one of the exceptions of IRC Sec. 274(e).

Continue to be deductible – IRC sec. 274(e)

•

Food and beverages furnished on premises

primarily for employees.  TCJA limits to

50%.

•

Expenses treated as compensation

•

Reimbursed Expenses incurred on behalf of

another person

•

Recreational, social or similar activities

primarily for the benefit of employees

Continue to be deductible – IRC sec. 274(e)

•

Employee, stockholder, business meetings

•

Meeting of business leagues etc..

•

Items made available to the public (e.g.,

promotional popcorn, snacks)

•

Entertainment sold to customers [IRC Sec.

274(e)(8)].

•

Expenses includable in income of persons

who are not employees  - Prizes and

awards.

Meals

•

TCJA generally maintains a meal deduction with some

modifications.

•

The Code contains numerous provisions in which a meal

can be deducted or excluded from income:

–

IRC Sec. 274(k) deals with business meals.

–

IRC Sec. 132 deals with “fringe benefits excludable

from an employee’s income.

–

IRC Sec. 119 deals with meals and lodging furnished

for the convenience of the employer.

Meals

TCJA –Still Deductible:

•

50% of food and beverage expenses associated with

trade and business. This includes business travel

•

Cannot be lavish

•

Taxpayer or employee must be present

Observation: 

TCJA eliminated the “directly-related or

associated standard. So what is the standard?

Example: 

Gary uses his speed boat for entertaining

customers. During 2017, no expenses were allowed for

depreciation, insurance, repairs, etc. for the boat since it

is an entertainment facility. However, if business was

discussed during the speedboat outing, the cost of out of

pocket expenses such as fuel, food and beverage

consumed during the outing were allowed subject to the

50% limitation.

TCJA:

 Beginning in 2018, the out-of-pocket expenses are

also disallowed.

•

Example: 

During 2017, after signing up a great client,

Gary takes the client to a Washington Redskin’s football

game in which they lose to Philadelphia Eagles 30 to 7

(insert your own fantasy here). Under prior law, the

expenses were deductible as entertainment since it was

“associated with” the active conduct of a trade or

business. Accordingly, Gary got to deduct 50% of the

cost.

•

During 2018, he takes another client to another game

against the Eagles, once again the Redskins lose and to

make matters worse the cost is no longer deductible.

•

Example: 

During 2017, Gary hosts a public seminar on

the new tax law.  Gary may deduct 100% of the

expenses associated with the seminar.

•

During 2018, Gary hosts another seminar for the public.

He is still able to deduct 100% of seminar expenses

under the exception for items made available to the

public.

•

Example: 

Gary provides coffee and soda to customers

and employees while on his premises. During 2017,

these costs were 100% deductible under the de minimis

exception.

•

During 2018, while still provided tax free to the

employees (and customers), they are only 50%

deductible under the de minimis exception, because

the TCJA made the de minimis fringe benefit exception

subject to the 50% rule.

•

Example: 

Gary provides food and beverages at an

annual Christmas party primarily for the benefit of

employees.  For 2017, 100% of these costs are

deductible.

•

For 2018, they are still 100% deductible provided the

exception for recreational, social or similar activities

primarily for the benefit of employees other than highly

compensated employees is met.

•

Example: 

Gary travels away from home overnight for

business purposes. The cost of meals while away from

home are deductible for 2017, subject to a 50%

limitation.  During 2018, they are still deductible subject

to a 50% limitation.

NEW LOSS LIMITATION –OTHER THAN C CORPS

Prior Law:  

Provision for excess subsidized farm

losses .

TCJA:

 Effective for tax years beginning after

12/31/17 and before 1/1/2026.

•

Suspends prior provision (2018-2025)

•

Provides a new excess business loss to all

taxpayers other than C Corporations.

NEW LOSS LIMITATION –OTHER THAN C CORPS

Excess business loss is the:

•

Excess of that taxpayer’s deductions over the

gross income or gain  plus

–

$500,000 for Joint filers

–

$250,000 for all others.

NEW LOSS LIMITATION –OTHER THAN C CORPS

•

In other words losses in excess of $500,000 on a

joint return or $250,000 for other filers are

treated as part of the taxpayer’s NOL.

•

For S Corps and partnerships this is determined

at the shareholder level.

•

This is applied after passive loss rules.

•

Does this mean passives can be further

suspended?

NEW LOSS LIMITATION –OTHER THAN C CORPS

•

During 2018, Tony, a single taxpayer, has deductions of

$500,000 from a business. His gross income from the

business is $200,000. His excess business loss is $50,000

($500,000 - ($200,000 + $250,000)). The $50,000 excess

business loss is treated as part of a taxpayer's net

operating loss (NOL) carryforward to later years.

•

NEW LOSS LIMITATION –OTHER THAN C CORPS

EXAMPLE 2:

 The facts are the same as in Example 1,

except Tony is married and files a joint return. Tony

doesn't have an excess business loss because the

aggregate business deductions ($500,000) don't exceed

the $200,000 of business income plus the $500,000

threshold for joint filers.

Net Operating Losses (IRC 172)

Old Law: 

NOL generally carried back 2 years and carried over

20 years to offset taxable income. Law allowed for other

carryback periods for certain losses.

Net Operating Losses (IRC 172)

New Law:

•

For NOLs arising in tax years ending after 12/31/17,

the 2 year carryback and special carryback provisions

are repealed.

•

A 2 year carryback applies to the trade or business of

farming.

•

For losses arising in tax years beginning after

12/31/17, the NOL deduction is limited to 80% of

taxable income.  NOLs can be carried forward

indefinitely.

•

NOLs of property and casualty insurance companies

can be carried back 2 and forward 20 years and offset

100% of taxable income in such years.

Net Operating Losses (IRC 172)

Example:

Jim has a 2018 NOL of $120,000. He can no

longer carry the NOL back so he has to carry it

forward to 2019.  In 2019, his income is

$100,000. He is entitled to use $80,000 of the

NOL  with the remainder of $40,000

carryforward to 2020.

Net Operating Losses (IRC 172)

•

Observation:

 The effective date means that

NOLs arising in tax years that ended before

January 1, 2018 will be subject to the 2-year

carryback and 20-year carryforward rules that

applied before the TCJA.  Furthermore, losses

arising in tax years before January 1, 2018

won’t be subject to the 80% of taxable-income

limitation.

Code Sec. 179 Expensing

Old Law: 

Allowed the expensing of qualified property of up

to $500,000. The limit was reduced for expenditures

exceeding $2 million. These amounts were index.  $510,000

with $2.03 million for 2017.

New Law: 

For tax years beginning after 12/31/17:

•

Expensing limit increased to $1 million with $2.5 million threshold

•

Made permanent ability to make, change or revoke election

New 179 Limits

Code Sec. 179 Expensing

The TCJA expands the definition of Section 179 property

to include tangible personal property used

predominantly in furnishing lodging or in connection

with the furnishing of lodging. This includes beds and

other furniture, refrigerators, ranges, and other

equipment used in a lodging facility such as an

apartment house, dormitory, or any other facility (or

part of a facility) where sleeping accommodations are

provided and let. This is accomplished by adding to IRC

Sec. 179(d)(1) that property described in IRC Sec.

50(b)(2) is no longer ineligible to be Section 179

property.

Code Sec. 179 Expensing

NEW LAW:  

The TCJA has made the $25,000 Section

179 limitation for SUVs adjustable for inflation in $100

increments for taxable years beginning after 2018 [IRC

Sec. 179(b)(6)(A)].

Code Sec. 179 Expensing

New Law:

•

Qualified improvement property is any improvement

to an interior portion of a building which is non-

residential real property if the improvement is placed

in service after the date the building was first placed

in service, except for any improvement for which the

expenditure is attributable to: (1) enlargement of the

building, (2) any elevator or escalator or (3) the

internal structural framework of the building.

Code Sec. 179 Expensing

New Law:

•

Qualified improvement property-  includes property

without regard to the business it is used in or whether

the space is leased.  This was the definition used for

bonus depreciation.

Code Sec. 179 Expensing

The TCJA changes the definition of qualified real

property by [IRC Sec. 179(e)]:

•

Substituting qualified improvement property for

qualified leasehold improvement property, in the

definition of qualified real property.

•

Adding roofs, heating, ventilation and air-

conditioning (HVAC), fire-protection and alarm

systems, and security systems (that meet

requirements described under certain structural

components, below).

Code Sec. 179 Expensing

•

The one way the TCJA’s definition of qualified real

property is more restrictive is the exclusion of

restaurant buildings and some restaurant

improvements (i.e., building enlargements, elevators

and escalators, and internal structural framework). [IRC

Secs. 168(e)(6) and 179(f)]

Bonus Depreciation (IRC 168(k))

Old Law: 

Original use property and qualified improvement

property was 50% bonus eligible. Bonus was set to expire on

12/31/19.

Bonus Depreciation (IRC 168(k))

New Law:

•

“

Temporary 100-Percent Expenses for Certain Business Assets”

•

Extends bonus until 12/31/26 with a phase down.

•

Expands the definition of qualified property to include:

–

“used property”

–

Qualified film and television and qualified live theatrical

productions.

•

Excludes certain public utility property and vehicle dealer

property.

•

Eliminates the phase down in 2018 and 2019 of the $8,000

increase for passenger automobiles.

•

Eliminates the Corporate AMT exchange election – Corp AMT is

eliminated.

Bonus Depreciation (IRC 168(k))

New Law:

•

Taxpayer can elect in in the taxpayer’s first tax year

ending after 9/27/17 to apply the 50% rate

Bonus Depreciation (IRC 168(k))

New Law:

•

Property obtained from a related party or between

members of a controlled group is not qualified.

15-Year Recovery Period

Old Law: 

Only certain types of building improvements

were able to use 15 year recovery period:

•

Qualified leasehold improvement property

•

Qualified restaurant property

•

Qualified retail improvement property

15-Year Recovery Period

New Law:

•

Eliminates the three prior definitions above

•

Provides a general 15 year recovery period

for qualified improvement property.

Committee Report Section 13204 Code Sec.

168.

•

The 15 year was not in the statutory

language of the law. – Thomson Reuters

Closer Look at Nonresidential Real Estate

Gary the accountant  his business from a building that

he owns.  In the current year, he improves his suit inside

the building.

Closer Look at Nonresidential Real Estate

Prior to the PATH Act 

– Gary was not entitled to bonus

depreciation, Code Sec. 179 or 15 year depreciation.

•

His business was not a restaurant or retail business.

•

He did not meet the requirement for qualified

leasehold improvement property.

–

Improvement pursuant to a lease.

–

Building had to be in place for 3 years and

–

Related party provision – IRC 267(b) relations with

substituting more than “80% “ with more than 50%.

Closer Look at Nonresidential Real Estate

With the PATH Act 

– Gary was entitled to bonus

depreciation but not IRC. 179 or 15 year depreciation.

•

The PATH Act used “Qualified Improvement Property”

for bonus depreciation, which was any improvement to

the interior of a non-residential property, other than an

enlargement of the building, any elevator or escalator,

or internal frame of the building.

•

The PATH Act retained the qualified leasehold

improvement property, qualified retail improvement

and qualified restaurant property  for the purposes of

Code Sec. 179 and 15 Years.

Closer Look at Nonresidential Real Estate

Tax Cuts and Jobs Act: 

Provided the expenditures meet

the definition of “qualified improvement property”, Gary

will be entitled to bonus depreciation, IRC 179 expensing

and 15 recovery period.

(a)- IRS insists technical correction needed.

Depreciation Caps on Passenger Automobiles

Old Law: 

Code Sec 280F(a) imposes dollar caps on

the depreciation deductions including Code Sec. 179

expensing election with respect to “passenger autos”

New Law: 

Increased the base caps for Automobiles-

$8,000 in bonus still applies!

Depreciation Caps on Passenger Automobiles

Luxury Automobile Depreciation

Tax Cuts and Jobs Act

•

To get the extra $8,000 in 2017 the auto has to be

original use property. Not so for 2018

Luxury Automobile Depreciation

SUVs and trucks with a gross vehicle weight over 6,000 lbs.

still get up to $25,000

Other Depreciation Mentions

•

Computers and peripheral equipment no longer listed

property.

•

ADS life for nonresidential real estate shortened to 40 years.

•

ADS life for residential real estate shortened to 30 years.

•

ADS depreciation for buildings if election is made to exempt

real property to the interest deduction limit.

•

Most new farm equipment and machinery is 5 year MACRS

•

200% declining balance for many types of farm property.

•

ADS required for 10 year or more property if election is made

to exempt farm from business income limitation.

Cash Basis- IRC 448

Old Law:

•

Tax shelters could never use the cash basis.

•

Most businesses under $1,000,000 in average

gross receipts could use the cash basis and

•

Some taxpayers under $10,000,000 average

gross receipts could continue to use cash basis.

–

C Corps in certain services were entitled to

use cash basis up to $5,000,000.

•

Qualified Professional Service Corps and

Farming businesses were permitted unlimited

use cash basis.

Cash Basis- IRC 448

New Law:

•

Expands the use of the cash basis provided the 3

year average gross receipts doesn’t exceed $25

Million. IRC 448(c)(1) for years beginning after

12/31/17.

•

For years after 2018 the amount is adjusted for

inflation.

•

This provision includes C Corporations which were

previously limited to $5,000,000.

•

PSC and Farm Corp rules remain in place.

•

Observation: 

These are accounting method changes

and will require 481A adjustments via Form 3115.

Other Accounting Method Change

Old Law: 

There were a number of exceptions from which

taxpayers did not have to keep or maintain inventory.

Average gross receipts didn’t exceed $1,000,000 and

certain individuals under $10,000,000.

•

These exceptions were included in the cash basis relief.

•

Inventory was treated as a form of “non-incidental”

material and supply.

Other Accounting Method Change

.

New Law:

•

Extends this treatment to those that meet the $25

million gross receipts tests.

•

Those meeting this test also are exempt from the

UNICAP rules.

•

Small contractors below $25 million exempt from

percentage of completion.

Like Kind Exchanges – Section 1031

•

Only real property qualifies for like-kind exchanges

•

Previously a wide range of property including

tangible personal property was eligible

•

Transition rule

•

Generally the new rule applies to transfers after

2017

•

However an exchange of property other than real

property may be completed for a relinquished

property disposed of on or before Dec 31, 2017 or

a replacement property acquired on or before Dec

31, 2017

S to C Corporation?

Old Law:

•

When an S Election is revoked the taxpayer is given a limited

period in which to pay out the AAA or make an additional

capital contribution to take suspended losses.

•

This period is referred to as the “post-termination transition

period(PTTP). The period begins with the last day of the S

year and ends on the later of one year after that day or the

due date including extensions for filing the last S return.

•

Accounting method changes are normally taken into account

if positive for up to 4 years. De minis $50K.  Negative changes

can be taken in the year of the changes

.

S to C Corporation?

New Law:

•

Accounting Method Changes with the

revocation- adjustments will be taken over 6

years rather than 4 years.

•

Corp changes from accrual to cash with the

revocation of S Election the 481A adjustment

can be taken over 6 years.

S to Corporation?

New Law:

•

If an eligible S Corporation revokes its election and

makes a cash distribution after the  PTTP, the

allocation of the distribution to AAA and E&P is

based on the ratio of the AAA  to E&P.

•

This is beneficial since under the old rules the

distributions were considered made out of E&P first.

Distributions from E&P are taxable dividends.

•

Effective: 12/22/17.

C  Corp(Non-PSC)

•

Advantages

•

Tax rate – now flat for all

corps.

•

Fiscal Year

•

Better benefits

•

1202 treatment

•

1244 loss treatment

•

Passive loss offset Income.

•

Disadvantages

•

Audit Risk > S Corp

•

PSC restrictions

•

NIIT

•

No Capital loss

•

Cap. Gains ordinary rates

•

Double Taxation

Professional Services- Tony Johnson’s Acronym

Professional Service Corporations(PSC)

A. Limitations

•

Limited choice in

year end.

•

444 owner payment

limitations.

•

PALs = No Offset

against other

income.

•

AET -$150,000

B. Meets all of the following:

•

C Corporation

•

HEAL A CPA Activity

•

More than 50% of Comp.

attributed to PSC services.

•

> 20% Comp for PSC services

performed by owner employees.

•

On last day of year, employee

owners own more than 10% of

stock. (IRC. 318)

VI. Qualified Personal Service Corporations

Issues

•

35% Flat tax 

–no longer

an issue! -21% like

everyone else!

•

Unlimited use  of cash

basis.

Defined

•

Function test- 95% or

more of employee time

is HEAL A CPA

•

Ownership - 95% or

more of stock at all

times held by current or

retired employees who

perform services.

S to C Corporation?

•

For Years beginning after 12/31/17 the corporation tax rate is a flat

21% rate. Even for QPSC.

•

The Corporate AMT is repealed- this was not a big deal to C Corps

with $7.5 million in gross receipts.

•

Individual rates are as high as 37% with the prospect of paying either :

–

Additional Medicare Tax - .9% on earn income

–

Net Investment Income Tax- 3.8% on investment and passive income

•

Qualified dividend rates still apply 0%, 15%, 20%

•

C Corps deduct the state and local taxes but the SALT on an individual

return is limited. Problematically, some states have higher corporate

income tax rates.  Pennsylvania Corp rate 9.990% vs 3.7%.

•

The double taxation still exists = Corp pays tax then the dividend is

taxable to the shareholder.

S to C Corporation?

•

C Corps that are not PSC can use other than a calendar year

and also can offset passive losses against active income.

•

It is expected that some S Corporations will want to revoke

the S election.

•

Election to revoke can be made with the consent of

shareholders owning more than 50% of the outstanding

stock.

•

If revocation is made by the 15

th

 days of the 3

rd

 month it can

be retroactive to the beginning of the year. Otherwise it

creates 2 short year returns.

C Corporation?

C Corporation?

Interest Limitation (Code Sec. 163(j))

Old Law:  

Interest paid by a business was deductible in the

calculation of business income.  For taxpayers other than

corporations, interest paid on property held for investment

was limited to the taxpayers investment income.

New Law: 

For years beginning after 12/31/17

•

Every business, regardless of form is generally subject to a

disallowance of net interest expense in excess of 30% of the

business’s adjusted taxable income.

•

Special rule for taxpayers with average gross receipts not exceeding

$25 million, the limit does not apply.

•

Special rule for pass-through entities-determination is made at the

entity level.

Interest Limitation (Code Sec. 163(j))

New Law: 

For years beginning after 12/31/17

•

Every business, regardless of form is generally subject

to a disallowance of net interest expense in excess of

30% of the business’s adjusted taxable income.

•

Special rule for taxpayers with average gross receipts

not exceeding $25 million, the limit does not apply.

•

Special rule for pass-through entities-determination is

made at the entity level.

Interest Limitation (Code Sec. 163(j))

The deduction allows that business interest in any tax

year 

cannot 

exceed the sum of:

•

Business interest income [IRC Sec. 163(j)(1)(A)];

•

30 percent of the adjusted taxable income of the

taxpayer for the taxable year [IRC Sec. 163(j)(1)(B)];

plus

•

3. The floor plan financing interest of the taxpayer for

the taxable year 

[IRC Sec. 163(j)(1)(C)].

•

NOTE: The 30% of adjusted taxable income cannot be

less than zero [IRC Sec. 163(j)(1)].

Interest Limitation (Code Sec. 163(j))

The deduction allows that business interest in any tax

year 

cannot 

exceed the sum of:

•

Business interest income [IRC Sec. 163(j)(1)(A)];

•

30 percent of the adjusted taxable income of the

taxpayer for the taxable year [IRC Sec. 163(j)(1)(B)];

plus

•

3. The floor plan financing interest of the taxpayer for

the taxable year 

[IRC Sec. 163(j)(1)(C)].

•

NOTE: The 30% of adjusted taxable income cannot be

less than zero [IRC Sec. 163(j)(1)].

Interest Limitation (Code Sec. 163(j))

The limitation does not apply to:

•

Businesses meeting the $25 million gross receipt test

•

Electing real estate professionals

•

Electing farm businesses

Interest Limitation (Code Sec. 163(j))

$25 Million Gross Receipts Test:

•

This test is met if a taxpayer's average annual gross

receipts for the three tax-year period ending with the

prior tax year don't exceed $25 million. (Comm. Rept.,

see ¶5044)

•

This exception does not apply to tax shelters.

Interest Limitation (Code Sec. 163(j))

Electing Qualified Real Estate Professionals

•

Meets the definition of real estate professional (IRC

Sec. 469(c)(7)(C)).

•

Real 

property development, redevelopment,

construction, reconstruction, acquisition,

conversion, rental, operation, management,

leasing, or brokerage trade or business.

Interest Limitation (Code Sec. 163(j))

Electing Qualified Real Estate Professionals

•

Must make an irrevocable election as directed

by IRS.

•

If election is made must use  ADS depreciation

for non-residential, residential and qualified

improvement property.

Interest Limitation (Code Sec. 163(j))

Electing Qualified Real Estate Professionals

•

Must make an irrevocable election as directed

by IRS.

•

If election is made must use  ADS depreciation

for non-residential, residential and qualified

improvement property.

Interest Limitation

•

Interest limitation does not apply to an electing

farm business.

•

Election is irrevocable

•

Making the election requires the electing farm

business to use ADS to depreciate any property

used in the farming business with a recovery of

ten years or more.

Additional Resources

•

Thomson Reuters- 

https://tax.thomsonreuters.com/blog/tax-

cuts-and-jobs-act-changes

•

2018 Gear Up Business Entity Course- We will be discussing in

detail all the business related changes including qualified real

property, flow-through deductions, in depth look at changes

affecting partnerships, S and C Corporations.

https://checkpointlearning.thomsonreuters.com/CourseFinder

/Search/?pageNumber=1&brand=4&df=2&isInIframe=False&is

BasicSearch=true

•

2018 Gear Up 1040 Course- complete analysis of all individual

changes and developments.

Questions?