1. Tax Cuts and Jobs Act MIDTOWN RALEIGH ALLIANCE February 15, 2018

2. Disclaimer
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. The application and impact of laws can vary widely based on the specific facts involved. You should consult your tax, legal and accounting advisors before engaging in any transaction.

4. Tax Cuts in Billions Tax Cuts in Billions
Corporate/Business ($653) S-Corps/Partnership/Sole Proprietor ($414) International Tax Changes $324 Estate Tax Changes ($ 83) Remaining Individual Changes ($629) Total ($1,456)

5. Budget Reconciliation Process
Streamlined Approach: Simple majority in Senate Rather than standard 60 votes Only if: Tax cuts < $1.5 trillion over 10 years Individual provision expires 12/31/ Business and Corporate cuts are permanent

6. Budget Reconciliation Process
Most comprehensive tax overhaul since Passed without support of one democrat Senate 51 – House 227 – Republicans voting against

7. Corporate Income Tax
Reduces Corporate rate from 35% to 21% (flat rate). NC rate is 3% reducing to 2.5% in 2019 AMT for Corporations repealed. Double taxation - prior law 10%: - C-Corporations 50.47% (35% + (65% * 23.8%) - S Corp / LLC 40.8% % + 1.2% itemized deduction phase out

8. Corporate Income Tax
Double taxation - new law 2.8% C Corporations 39.8% (21% * (79% * 23.8%) S Corps / LLC 37% Double taxation – 10% after applying 20% qualified business income deduction C Corporations 39.8% S Corps / LLC 29.6% (37% * 80%)

9. 20% Deduction “Qualified Business Income”
Applies to S-Corps, Partnerships & Sole Proprietorships. Also applies to Trusts and Estates. Calculated as the LESSER OF: % of “Qualified Business Income” OR: GREATER OF: % of W-2 wages OR: % of W-2 wages plus 2.5% of the unadjusted basis of all qualified property

10. Qualified Business Income Example
Mgmt company - MOST guidance has used the logic that we should follow the now repealed Section wages are allocated to the common law employer of the employee (The party hiring the payroll service with control of the employees).

11. “Qualified Business Income” Section 199A
Definition is net ordinary income effectively connected with US trade or business Does not include: - W-2 wages - Capital gains or losses - Dividend income - Interest income

12. Defined as any tangible property subject to depreciation
Defined as any tangible property subject to depreciation. Qualified property does not include: - Land – (Land Development) - Inventory - Depreciable period can not end prior to end of the tax year. Depreciable period is LATER OF: years or - The assets regular depreciation period under MACRS Unadjusted basis of qualified property: - Cost is not reduced by depreciation
“Qualified Property”

13. Exception to Wage Limit
The wage limit does not apply if taxable income is equal to or less than: $315,000 MFJ - $157,500 Single Phased out over: $100,000 MFJ - $50,000 Single Will be indexed for inflation starting 2019.

14. 20% Deduction – N/A to Service Businesses
Service trade or businesses include: Fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services Any business where the principal assets is the reputation or skill of one or more of its employees. Exception: Architects and Engineers allowed 20% deduction 20% Deduction allowed up to taxable income limits $315,000 MFJ - $157,500 Single

15. Interest Deduction Limitation
Applies to companies over $25M in Sales - Must combine related party companies Limited to 30% of “Adjusted Taxable Income” Net business income plus: - Interest expense - Depreciation - Amortization / Depletion Disallowed interest can be carried forward. Real estate businesses can elect out of these rules Then must use Alternative Depreciation System.

16. Business Interest Deduction Example
Assume LP and Inc hit $30MM avg. gross receipts:
LP interest expense would be limited:
Taxable Income ,825
Business Interest Expense ,010,458
Depreciation/Amortization ,458
Total Adjusted Taxable Income ,777,430
30% limitation ,229
Consider making election to exclude real property trade or business
If so, you must use Alternative Depreciation System

17. Other Business Changes
Cash basis allowed if average gross income < $25M: Can use cash basis of accounting, even with inventory Not required to capitalize 263A costs Interest limitation of 30% “adjusted taxable income” does not apply. Net Operating Losses No longer able to carryback, able to carryforward indefinitely NOL carryforward will offset 80% of current year income. Business meals still 50% deductible. Entertainment no longer deductible.

18. Key changes to Depreciation

19. Bonus Depreciation Percentage
Qualified Property:
Tangible property depreciated under MACRS with a recovery period of 20 years or less
Election to apply 50% rate
Bonus Depreciation Percentage
Property Eligible
September 27, 2017
50%
Applies to new property only
September 28, 2017 – 2022
100%
Phased out 20%/yr
Applies to new and used property

20. Qualified Improvement Property
Any improvement to an interior of a nonresidential building if placed in service after the date the building was first placed in service.
Excluded expenditures: (1) the enlargement of a building, (2) any elevator or escalator, or (3) the internal structural framework of the building.
Assigned 15-year recovery period, straight-line method, & bonus eligible

21. Section 179
Limitations Increased: $1 million expensing; $2.5 million investment
$25,000 Limit on SUVs: Adjusted for inflation after 2018
Personal Property w/in Residential Rental: Can take Sec 179 after 2017
Section 179 dollar limitation is increased from $510,000 in 2017 to $1 mil; and the investment limitation is increased from $2,030,000 in 2017 to $2.5 million for tax years after These increases are permanent and will be adjusted for inflation starting after 2018.
The $25k section 179 limit on SUVs will be adjusted for inflation after 2018
Personal property within a “Lodging facility” (ie, residential rental) qualifies for Sec 179 if PIS after 2017
Previously, “Qualified Real Property” consisted of qualified leasehold improvement property, qualified retail improvement property, and qualified restaurant property – so basically property eligible for an MACRS 15-year recovery period. Now it is defined as Qualified Improvement Property and certain building and structural improvements that include roofs, heating and air, and security systems/fire alarms.
Not favorable to restaurant owners, because previously restaurant buildings and improvements to exterior and interior qualified for expensing under the qualified real property category (Sec 179)

22. Section 179 vs Bonus Choosing Section 179:
If we don’t want to take the net income into a loss position
If bonus not allowed (i.e. Roofs, HVACs, etc.)
Choosing Bonus Deprecation Instead of 179
Passive investors
Trusts

23. Individual Tax Reform Most Provisions Expire 2025

24. Individual Tax Reform – Quick 6
Qualified Charitable Distributions from IRAs
529 Plans for all school ages
Child Tax Credits Increased
Kiddie Tax Rates – Same as trust rates
New divorces alimony Non-Deductible
Estate tax increased to $11.2 million  ($22.4 million per married couple)
TAX TIP – revisit estate plan to determine impact; trust still make sense for asset protection from creditors and other

25. Itemized Deductions
Property and State tax deduction limited to $10,000
Makes state tax credits more valuable – solar, historic, foreign
TAX TIP –NC one of few states in country offer FTC – double benefit
Home mortgage interest limited to $750,00 for new mortgages created after 12/15/17 – can refinance
Interest on Home Equity Indebtedness not allowed except if the debt was used for improvements. (Tracing rules still apply)
No more 2% miscellaneous itemized deductions
No more 3% of AGI phase outs—positive for high income taxpayers
Fewer itemizing – bunching expenses every other year
$100 dividend from foreign stock; $15 foreign tax credit – the same $15 reduces fed and NC tax and likely neither is deductible driving up after tax return
Mortgage -- but old mortgages that are refinanced are grandfathered in provided the new mortgage is less than or equal to the outstanding debt on the original mortgage
2% - —unreimbursed employee expenses, tax prep fees, investment fees and expenses, etc.

26. Kiddie Tax
Kiddie tax. A "kiddie tax" is imposed on the net unearned income of a child. Generally, these rules apply to a child if:
the child is required to file a tax return;
the child's investment income is more than $2,100 (for 2018);
at the end of the tax year, the child is either: (a) under the age of 18; (b) under the age of 19 and does not provide more than half of his or her own support with earned income; or (c) under the age of 24, a full-time student, and does not provide more than half of his or her own support with earned income.
2018 CHANGE- Child is no longer affected by parent’s higher tax rate. Rather, they are taxed at the ordinary and capital gains rates applicable to trusts. Earned income of child taxed at single individual brackets and rates.
Unearned income brackets for Kiddie Tax using
Trust and Estates Brackets
Over --
But Not Over-
The tax is:
Of the amount over --
$ 0
2,550
10% $0
9,150
$ %
12,500
1, %
3, %
$100 dividend from foreign stock; $15 foreign tax credit – the same $15 reduces fed and NC tax and likely neither is deductible driving up after tax return
Mortgage -- but old mortgages that are refinanced are grandfathered in provided the new mortgage is less than or equal to the outstanding debt on the original mortgage
2% - —unreimbursed employee expenses, tax prep fees, investment fees and expenses, etc.

27. Capital Gains Taxable Income Thresholds MFJ and SURVIVING SPOUSE
Capital Gain Rates
NOTES:
Additional 3.8% Net Investment Income tax still in effect when AGI over $200K (Single) or $250K (Married)
Unrecaptured 1250 gain still taxed at max 25%
Capital Gains Taxable Income Thresholds
SINGLE
MFJ and SURVIVING SPOUSE
ESTATES and TRUSTS
CAPITAL GAINS RATE
$ $38,600
$ $77,200
$ $2,600 0%
$38,600-$425,800
$77,200-$479,000
$2,600 - $12,700
15%
> $425,800
> $479,000
> $12,700
20%
$100 dividend from foreign stock; $15 foreign tax credit – the same $15 reduces fed and NC tax and likely neither is deductible driving up after tax return
Mortgage -- but old mortgages that are refinanced are grandfathered in provided the new mortgage is less than or equal to the outstanding debt on the original mortgage
2% - —unreimbursed employee expenses, tax prep fees, investment fees and expenses, etc.

28. Individual Rates Rates and brackets modified 2018 – 2025
2017 Married filing Joint:
If taxable income is:
The tax is:
Over—
but not over—
Of the amount over-
$ 0
$18,650
10% $0
18,650
75,900
$1, %
153,100
10, %
233,350
29, %
416,700
52, %
470,700
112, %
131, %
2018 Married filing Joint:
If taxable income is:
The tax is:
Over—
but not over—
Of the amount over-
$ 0
$19,050
10% $0
19,050
77,400
$1, %
165,000
8, %
315,000
28, %
400,000
64, %
600,000
91, %
161, %
$100 dividend from foreign stock; $15 foreign tax credit – the same $15 reduces fed and NC tax and likely neither is deductible driving up after tax return
Mortgage -- but old mortgages that are refinanced are grandfathered in provided the new mortgage is less than or equal to the outstanding debt on the original mortgage
2% - —unreimbursed employee expenses, tax prep fees, investment fees and expenses, etc.

29. Individual Tax Comparison
Example 1: The Manns
Family of 2
Adjusted gross income = $150,000
No itemized deductions
All income is W-2
2017
2018
Adjusted Gross Income
$150,000
Itemized Deductions $0
Standard Deduction
($12,700)
($24,000)
Personal Exemptions
($8,100)
Taxable Income
$129,200
$126,000
Total Tax
$23,778
$19,599
Tax Savings
($4,179) (21.32%)

30. Individual Tax Comparison
Example 2: The Smiths
Family of 4
Adjusted gross income = $250,000
State income taxes = $12,000 and local property taxes = $3,000
Home mortgage interest = $5,000
Charitable contributions = $5,000
2017
2018
Adjusted Gross Income
$250,000
Itemized Deductions
($25,000)
($20,000)
Standard Deduction
($12,700)
($24,000)
Personal Exemptions
($16,200) $0
Taxable Income
$208,800
$226,000
Tax Before Credits
$45,349
$42,819
Child Tax Credit
($4,000)
Tax After Credits
$38,819
Tax Savings
($6,530) (16.82%)

31. Other Thoughts Regarding Entity Choice

32. C Corporation Considerations
Non-Tax Potential Benefits of C-Corporation
Simplification of tax filing requirements
No owner K-1s
Multi-state entities have one filing requirement at state level
1202 Stock – Qualified Small Business Stock
Issuance of multiple classes of stock
Payout of preferred returns to shareholders
Unlimited number of shareholders
No restriction on type of ownership
Set up entity with a fiscal year-end
Incentive Stock Options for employees
Ease of future capital raises with authorized, non-outstanding shares
Tax deductible owner fringe benefits
Corporate AMT repealed
State Income Tax fully deductible

33. C Corporation Considerations
Reduce to flat 21% rate effective for tax years beginning after 2017, with no sunset.
TAX TIP – entity choice – C corp can make sense if:
Retaining earnings to:
Grow balance sheet
Pay down debt
Don’t qualify for 20% income exclusion
Not planning on selling/exit in next 10 years
If planning exit can be structured as stock deal and not asset
General rule – no appreciating assets inside C corp