1. A common sense approach
Tax Reform:
A common sense approach
Margaret Amsden
March 22, 2018

2. Agenda What to expect and when to expect it
Business / International Tax Provisions
Individual Tax Provisions
Planning
A graphic on tax reform (can use something we have, if we have it)

3. What to Expect and When to Expect It
Only a few provisions apply to 2017, while most apply to 2018 and forward
Business and international provisions are largely permanent, although some phase in and other phase out
Individual provisions are largely temporary covering the years 2018 through 2025
IRS has set Priority Guidance Plan which includes initial implementation of the Tax Cuts and Jobs Act

4. Business / International Provisions

5. C Corporation tax rates
Remove graduated rate structure replaced with flat 21% for C Corporations
Removed higher rate applied to Personal Service Corporations
A graphic about 21% or about C Corps or tax rates, in general

6. C Corporation Change in Tax Rates
Alternative Minimum Tax repealed
AMT credit carryovers will be allowed to offset up to 50% of regular tax in 2018 – 2020
AMT credit carryover percentage increases to 100% in years beginning in 2021
IMPACT: AMT Credit Carryovers are fully refundable by 2022

7. Bonus Depreciation Bonus depreciation has increased from 50% to 100%
Applicable to property placed in service after September 27, 2017
Bonus depreciation is now available for purchases of used personal property
Bonus depreciation begins to phase out by 20% per year 2022 until it is reduced to 0% in 2027
Bonus depreciation is automatic unless taxpayer elects out, must elect out on an entire class of property in any year

8. Section 179 New limits indexed for inflation:
Section 179 maximum expensing deduction increased to $1M
Limit will be reduced if total assets placed in service exceed $2.5M dollar for dollar
Qualified property is expanded to include “Qualified Real Property” which includes improvements to non-residential real property after the date the property was first placed in service
This is a permanent increase
Section 179 is an asset by asset election

9. Luxury Autos
Current law: luxury autos are subject to limitations under IRC 280F resulting in lengthening the period necessary to recover the cost of the property
New limits (without bonus depreciation) for luxury automobiles are essentially tripled - new limitations:
Year 1:                  $10, ($18,000 cap w/bonus depreciation)
Year 2:                  $16,000
Year 3:                  $ 9,600
Year 4 and future: $ 5,760
Luxury auto continues to not include vehicles with a Gross weight over 6,000 lbs

10. Domestic Production Activities Deduction
The DPAD:
Provided an effective tax rate reduction of 3% on domestic production activity has been repealed
The repeal is effective beginning in 2018
Anything on DPAd or domestic production (or production in general)

11. Example 1: C Corporation
Assumptions:
$1,500,000 Taxable income before depreciation and Domestic Production Activity Deduction
$1,000,000 Capital Expenditure investment
100% of income is qualified production income
New interest deduction limitation not applicable
Taxpayer not subject to AMT before repeal
De minims M&E expenses

12. Example 1: C Corporation
2017 TAX
2018 Tax
Income
$1,500,000
Bonus Depreciation
(500,000)
(1,000,000)
MACRS Depreciation
(142,850)
DPAD
(135,000)
Taxable Income
$722,150
$500,000
Tax
$252,752
$105,000
Effective Tax Rate
16.8% 7%

13. Methods of Accounting
The new legislation increases the average annual gross receipts limitation to $25M and will be adjusted for inflation
Cash Method
Inventory
IRC Section 263A
Long Term Contracts
Anything fun for accounting?

14. Business Interest Expense Limitation
Taxpayers with gross receipts in excess of $25M face possible limitations with regard to interest expense deductions
Interest in excess of 30% of Adjusted Taxable income will not be deductible
Amounts disallowed may be carried forward indefinitely
Applies to Net Interest Expense (i.e., Interest Expense – Interest Income)
Adjusted Taxable Income is:
Taxable Income before NOL + Interest + Taxes + Depreciation + Amortization through 2021 (EBITDA)
Beginning in 2022, the limit is based on Taxable Income before NOL + Taxes + Interest (EBIT)
The limitation is determined at the filer level (i.e., at the Corporation; S Corporation or Partnership level). In the case of an affiliated group that files a Consolidated return, at the consolidated tax return level.
Partnership limited interest expense is allocated on the Schedule K-1 and deducted in future periods based on the partners share of income in excess of the threshold.
Adjusted Taxable Income (i.e., EBITDA /EBIT beginning in 2022) is calculated before the 20% pass-through deduction
NOTE: Replaces old IRC Section 163(j). No direction on what happens to any existing carryover under old Interest stripping rules

15. Business Interest Expense Limitation
Real estate businesses can elect NOT to apply the limitation.
Businesses making this election would be required to use the alternative depreciation system (ADS) to depreciate certain property.
For an electing real estate business, ADS would be used to depreciate
nonresidential real property,
residential rental property, and
qualified improvement property

16. Example 2: Interest Deduction Limitation
Federal Taxable income
$1,500,000
Addbacks:
Interest Expense
850,000
Depreciation
100,000
Amortization
Adjusted taxable income
2,550,000
Limitation Percentage
30%
Maximum Interest Deduction
$765,000
Disallowed Interest
$85,000

17. Net Operating Losses (NOLs)
Net operating losses arising in tax years beginning after 2017 will be limited to 80% of taxable income
NOL’s arising in years ending after December 31, 2017 will no longer be available to carryback two years
IMPACT: An NOL arising in the 2017/2018 fiscal-year may not be carried back two years since it arose in a tax year ending after 2017
The same NOL is not subject to the 80 percent of taxable income limitation because the NOL did not arise in a tax year beginning after 2017
NOL’s available for carryover that arose in years prior to 2018 will not have limitation on utilization.
Under the previous law AMT NOL’s would have been limited to 90% of alternative minimum taxable income under the AMT
Carryforward period is now indefinite (rather than 20 years)
20% deduction for Qualified Business Income (QBI) of pass-through entities and the deduction for Foreign-Derived Intangible income (FDII) are not allowed as deductions in computing an NOL.

18. Meal Expense Meals continue to be subject to the 50% limitation
The 50% limitation will also apply to certain meals provided by an employer that were previously 100% deductible; most significantly, food and beverages provided to employees as de minimis fringe benefits
Meal graphic

19. Entertainment Expense
Even if there is a substantial and bona fide business discussion, entertainment expenses are no longer deductible
No deduction for:
An activity considered entertainment, amusement, or recreation
Membership dues for any club organized for business, pleasure, recreation, or other social purposes
A facility or portion of a facility used in connection with any of the above
EXCEPTION: Entertainment expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors, are still a permissible deduction

20. Example 3: 2017 Versus 2019 Comparison
Assumptions
Book income before depreciation
Interest Expense
Capital Expenditures
Entertainment expense
Meals expense
NOL C/F, from previous year
Taxpayer not subject to AMT prior to repeal
$1,000,000
1,000,000
250,000
200,000
1,500,000
Bullets and Assumptions not aligned to header – zeros need to align

21. Example 3: 2017 Versus 2019 Comparison
Interest Expense Limitation
2019
Book Income before Depreciation
$1,000,000
Entertainment Addback
250,000
Meals Addback
100,000
Taxable Income before Depreciation
$1,350,000
Addback Interest Expense
1,000,000
Adjusted Taxable income
$2,350,000
30%
Deductible Interest Expense
705,000
Suspended Interest Expense
295,000
Should we extend this chart like the others? Oddly placed

22. Example 3: 2017 Versus 2019 Comparison
Book Income before Dep’r
$1,000,000
Entertainment Addback
125,000
250,000
Meals Addback
100,000
Taxable Inc. before Dep’r
$1,225,000
$1,350,000
Bonus Depreciation
(500,000)
(1,000,000)
MACRS Depreciation
(142,857)
Interest Addback
295,000
Pre-NOL Taxable Income
582,143
645,000

23. Example 3: 2017 Versus 2019 Comparison
Pre-NOL Taxable Income
$582,143
$645,000
Less NOL
(582,143)
(516,000)
Regular Taxable Income
129,000
Regular Tax
27.090
AMT Calculation
$5,100
n/a
Note: In 2017, NOL Utilization is limited under AMT to 90%, $40,000 AMT Exemption, means only $18,214 subject to AMT

24. Other Provisions Repeal of Partnership Technical termination rules
Carried Interest or Re-characterization of Certain Gains
Change in Character - Self Created Asset
Patents, inventions, model or design (whether or not patented), a secret formula or process, copyright, a literary, musical or artistic composition, a letter or memorandum or similar property that are disposed of after 12/31/17 are not a capital asset in the hands of:
The taxpayer whose personal efforts created the property or
A taxpayer with a substituted or transferred basis from a taxpayer whose person efforts created the property.
Patents may still qualify for capital treatment under IRC §1235.

25. International Provisions
New Penalties
Form 5472s now subject to $25,000 failure to file penalty
No change to penalties on 5471, 8858, 8865 etc.
US Participation Exemption for C Corporations
A C Corporation receiving a dividend from a foreign subsidiary where they own at least 10% of the voting stock for 365 days in a 731 day period will no longer pay tax on such dividend
Previously such dividends would be taxed at the applicable corporate income tax rate

26. International Provisions
Mandatory Repatriation
As a transition to the Participation Exemption, a mandatory inclusion of accumulated earnings and profits is required and will be taxed at 15.5% to the extent attributable to liquid assets and 8% attributable to other assets
This is often times referred to as the “toll charge”
THIS TAX IS CALCUATED BASED ON 2017 NUMBERS AND IS DUE WITH THE 2017 TAX LIABILITY

27. International Provisions
Mandatory Repatriation
An election may be made to pay the transition tax in eight annual installments; triggering events included in legislation could accelerate installment payments
Special rule applies to S Corporations allow deferral of transition tax payment until a triggering event occurs
Foreign tax credits will be available to offset a portion of the transition tax due by C Corporations
Tax is considered a new Subpart F category and is expected to be calculated on Form 5471
8 Annual Installments: If elected, 8% of the net tax liability will be due for each of the first 5 installments, 15% for the sixth installment, 20% for the seventh installment, and 25% for the final installment.

28. International Provisions
Base Erosion Anti-Abuse Tax (BEAT)
Applies to domestic C Corporations that are part of a group with at least $500M of gross receipts
Must apply controlled group rules
Subsidiary of foreign parent company is most likely a member of a controlled group with the parent company and therefore must count the gross receipts of the parent company as well as other subsidiaries owned by the parent

29. International Provisions
BEAT
Almost all payments except purchased of inventory will be considered BEAT
If such payments are 3% or more of total deductions, the BEAT tax may apply
Additional information regarding base erosion payments expected to be added to Form 5472 for specific reporting
IMPACT: We need to make sure we fully understand the corporate structure of our multinational groups.

30. International Provisions - FDII
Foreign Derived Intangible Income (FDII) - Overview
New IRC §250(a) allows a domestic C corporation to deduct an amount which is the lesser of
1. The sum of 37.5% of its foreign derived intangible income plus 50% of its GILTI that is not included in its gross income, OR
2. Its taxable income
Deduction will be allowed equal to 37.5% of it’s “FDII” through 2025, when the deduction decreases to %
Results in an effective tax rate of % through 2025 and % thereafter

31. FDII
Framework
Only available to domestic C Corporations — NOT Applicable to S Corp, Partnership, Estate, trust etc.
Deduction Eligible Income
The gross income of a US C Corporation excluding: Subpart F, GILTI, financial services income, dividends received from a CFC, foreign branch income, and domestic oil and gas income

32. FDII
Observations
Foreign-derived intangible income is somewhat misleading
The application of the provision does not turn on the presence or absence of intangible property
Based on the definitions and calculations, it seems any US Corporation that engages in transactions with foreign persons/entities can potentially earn FDII

33. International Provisions - GILTI
Global Intangible Low-Taxed Income
A US shareholder of a controlled foreign corporation is required to include its global intangible low-taxed income (GILTI) in gross income for the tax year in a manner similar to Subpart F inclusions
Effect is to subject a US shareholder to tax on the combined net income of its CFCs that:
Is not otherwise taxed in the US on a current basis
Exceeds a fixed “routine return” on the CFC’s associated business assets
A 50% deduction (37.5% after 2025) is allowed for C Corporations, so the effective tax rate is 10.5% (13.125% after 2025)

34. International Provisions - GILTI
Observations
Additional clarification guidance expected
Foreign tax credit computations are more cumbersome and require more tracking than regular Subpart F
It appears taxes paid or accrued by CFCs with tested losses are lost and cannot be used to offset tax owed on GILTI inclusion -- don’t forget, no carryforward for disallowed credits is provided
INTANGIBLE INCOME IS NOT THE TRADITIONAL DEFINITION – IT IS POSSIBLE FOR ANY CFC TO HAVE RISK OF THIS INCOME

35. International Provisions - GILTI
Observations
Expense allocation will likely result in FTC limitation, therefore a residual US tax may be owed even with a foreign effective rate of %
Seems as though a foreign effective tax rate of % will be needed for this not to apply
CAUTION: DON’T FORGET ABOUT DOWNWARD ATTRIBUTION RULES NOW. A 10% US SHAREHOLDER WHO PREVIOUSLY DID NOT HAVE TO WORRY ABOUT SUBPART F BECAUSE THE FOREIGN SUBSIDIARY WAS NOT OWNED GREATER THAN 50% BY US SHAREHOLDERS COULD HAVE AN ISSUE.

36. Individual Provisions

37. Most of these changes expire in 2025

38. Pass-Through Tax Treatment
Beginning in 2018, a 20% deduction will apply to a taxpayer’s Qualified Business Income (QBI)
QBI is domestic business income
QBI does not include: interest, dividends (exception for REITs), short/long term capital gains/losses, commodities gain, foreign currency gains
The deduction applies to pass-through entities which includes: Sole proprietorships; partnerships; S Corporations; LLC’s; trusts and estates; REITs; qualified cooperatives; tiered pass-through entities

39. Pass-Through Tax Treatment
Deduction is limited to the lesser of:
20% of QBI, or
The greater of:
50% of W-2 wages paid with respect to qualified business; or
Sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property
PLUS
20% of qualified REIT dividends
Qualified publicly traded partnership income

40. Pass-Through Tax Treatment
Must be a qualified business to take the deduction
Specified service companies will not qualify unless taxpayers taxable income does not exceed $315K (married filing joint), or $157,500 for single filers
Specified service company includes services in the fields of:
Health, law, accounting, actuarial sciences, consulting, financial services, brokerage services
Engineering and architecture are specifically excluded from being classified as a specified service company
Some ambiguity in the law, additional clarification expected

41. Pass-Through Tax Treatment
The pass-through deduction is not a deduction in arriving at adjusted gross income.
IMPACT: it is unlikely you will receive the deduction for purposes of calculating your state tax liability
All qualified pass-through activities must be aggregated when calculating the deduction
IMPACT: losses from one entity will offset income from another entity (if both have qualified business income) when calculating the deduction

42. Pass-Through Tax Treatment
The pass-through deduction is not included in computation of Net Operating Loss
SE Taxes appear to be calculated on the full net business income before QBI deduction
Any image for net operating loss or tax treatment, or deducation?

43. Example 4: Pass-through Deduction
Assumptions:
Entity is owned 100% by taxpayer
Taxpayer is non-passive
Pass-through income $1,000,000
Pass-through deduction $200,000
Wages from pass-through $250,000
Taxpayer is married filing joint
Taxpayer will take the standard deduction

44. Example 4: Pass-through Deduction
2017
2018
Wages
$250,000
Pass-through Income
1,000,000
Adjusted Gross Income
1,250,000
Less: Standard deduction
(12,500)
(24,000)
Less: Pass-through deduction
(200,000)
Taxable Income
$1,237,300
$1,006,000
Tax
435,202
311,599
Effective Tax Rate
35.2%
31.0%
Tax Savings
$123,603

45. Excess Business Losses
Under IRC Section 461(l) – Excess business losses of non-corporate taxpayers not allowed for 2018 thru 2025
Any loss that is disallowed is treated as an NOL carryover to the following year
Applied at the partner/shareholder level based on distributable share of items of income, gain, loss, or deduction
Passive activity limitations are applied first
What is an excess business loss?
The taxpayer’s aggregate deductions for the tax year from the taxpayer’s trades or businesses; over
The aggregate gross income or gain from such trades or businesses + $250,000 ($500,000 MFJ)

46. Example 5: Excess Business Losses
Assumptions:
Taxpayer is single
Taxpayer is a non-passive owner of a retail business
Taxpayer’s share of gross income $1,000,000
Taxpayer’s share of deductions $1,400,000

47. Example 5: Excess Business Losses
Aggregate Deductions
$1,400,000
Aggregate Gross income
$1,000,000
Plus ($250k / $500k MFJ)
250,000
Total
$1,250,000
Excess Business Loss
$150,000
Excess Business Loss = Net Operating Loss Carryover to next year

48. Above the Line Deductions
Alimony:
Currently deductible by payer, includable in income of recipient
Agreements entered into after 12/31/18 no longer deductible by payer or taxed to recipient
Qualified Moving Expenses:
Employers may reimburse on a tax-free basis by excluding them from gross income
Employees may take an above the line deduction to the extent that they are not paid for by the employer

49. Itemized Deductions Increase the standard deduction:
From: $6,500 (single) and $13,000 (MFJ)
To: $12,000 (single) and $24,000 (MFJ)
Personal exemption are eliminated ($4,150 for each exemption)
Anything on deducations

50. Itemized Deductions
Deduction for medical expenses will be expanded by reducing the floor to 7.5% of income (from 10%)
This change only applies to 2017 and 2018
State and local taxes limited to $10,000 per year
Charitable Contribution Limitation:
Cash contributions to public and certain private charities are now limited to 60% of AGI (prior 50% limitation)
State tax limitation: This limitation was accomplished by adding IRC Section 164(b)(6) which limits the taxes under Section 164(a)(1) – (3) and 164(b)(5) as follows:
State and local real property tax
State and local personal property tax
State, local, foreign income, war profits and excess profits taxes
State and local Sales taxes

51. Itemized Deductions Mortgage interest:
Current Law: Qualified Residence Interest
$1,000,000 of Acquisition Indebtedness
$100,000 of Home Equity Indebtedness
Change: Qualified Residence interest
$750,000 of Acquisition Indebtedness
Home Equity Indebtedness is eliminated
Miscellaneous deduction, such as tax preparation fees, investment advisory fees, unreimbursed business expenses, etc. will no longer be deductible
Mortgage Interest:
NOTE: The new limit does not apply to mortgages entered into prior to 12/15/17 (i.e., they are grandfathered)
NOTE: it does not matter what the bank calls it. It is based on how funds are used.

52. Individual Brackets (MFJ)
7 brackets remain, however rates are lowered and brackets expanded
Change
10% - $0 - 18, % - $0 - 19,050
15% - $18, , % - $19, , % rate
25% - $75, , % - $77, , % rate
28% - $151, , % - $165, , % rate
33% - $231, , % - $315, , % rate
35% - $413, , % - $400, , Bracket size
39.6% - $466, % - $600, % rate

53. Individual Alternative Minimum Tax
AMT has NOT been repealed - Income thresholds have been increased:
From: $84,500 (MFJ) and $54,300 (single)
To: $109,400 (MFJ) and $70,300 (single)
The amount at which the exemption phases out also increases
From: $160,900 (MFJ) and $120,700 (single)
To: $1,000,000 (MFJ) and $500,000 (single)

54. Estate, Gift and GST
Estate, Gift and Generation Skipping Transfer Tax exemption increased
From: $5.6M per person
To: $11.2M per person
Exemptions will continue to be increased for inflation
The step-up in basis at death will remain in intact
Anything on Estate tax or gifting?

55. Individual Provisions - Example
Assumptions:
Married filing joint status
2 Children
Wage income
Interest income
Child care Expenses
State income/property taxes
Mortgage interest
Charitable contributions
$350,000
10,000
6,000
20,000
5,000
Can we align zeros?

56. Example 6: Individual Provisions
2017
2018
Wages
$350,000
Interest
10,000
AGI
360,000
Personal Exemptions
(16,200)
n/a
Itemized Deduction
(30,000)
Standard Deduction
(24,000)
Taxable Income
$313,800
$336,000
Tax before Credit
$78,966
$70,899
Child Tax Credit
(4,000)
Net Tax Liability
$66,899

57. Planning

58. Common Misconceptions
Due to the decreased corporate tax rate, I should switch my S Corp/LLC to a Corporation
Not necessarily. Need to “run the numbers”
Important consideration: what will you do with earnings; what is your exit strategy; other
All changes are applicable in some apply in 2017
R&E credits will no longer be available - not true, still apply
Everyone will see a decrease in their tax rate

59. Potential Opportunities
Lower Tax Rates = More Cash for investment
Export sales of good or services could be eligible for a special deduction (FDII)
Immediate expensing for capital expenditures (Bonus and/or Section 179)
Companies with less than $25M gross receipts should review accounting methods not previously available

60. Potential Landmines
Significant portions of the new legislation is unclear and requires further guidance from the IRS - makes tax planning difficult
Sale of self-created property not treated as a capital asset, which results in ordinary income - could impact M&A transaction structuring
Benefit of bonus depreciation rules and accounting method change opportunities could be impacted by excess business loss rules
Some taxpayers could actually see their tax liability increase even though marginal tax rates have decreased
International regulations are more complex and have some unintended consequences

61. Questions
Answers

62. Thank you!