1. 2018 Tax Update Tax Cut and Jobs Act
Justin Freeman, CPA and Patty Peaslee, CPA, CCIFP
November 13, 2018
BBSC, Certified Public Accountants

2. Justin Freeman
Justin joined BBSC in 2015, and has been in public accounting for greater than ten years. He earned his BS in Accounting in 2008 and his MS in Accounting in 2009, both from the University of Maine. Justin is a tax manager at BBSC, specializing in a variety of industries, including: real estate development, not-for-profit corporations, retail companies, and service providers. He advises on and prepares returns for partnerships, corporations, individuals, and non-profit organizations. He currently serves as treasurer for Camp Capella and the Ronald McDonald House Charities of Maine, and serves on the board of Amicus in Bangor.
2018 Tax Update
Tax Cut and Jobs Act

3. Patty Peaslee
Patty has been with BBSC since She specializes in construction accounting, providing clients with financial reporting services, tax planning and return preparation, and construction industry specific consulting. She has expertise in individual and corporate tax, as well as compiled, reviewed, and audited financial statement preparation across a wide range of industries. Patty earned her BS in Accounting with a minor in business administration from Strayer University and her MBA with a concentration in accounting from the University of Maine. She is treasurer of the Maine chapter of CFMA and serves on their membership committee. Additionally, she is a member of Associated Builders and Contractors of Maine, and is the current treasurer of the Brewer Economic Development Corporation.
2018 Tax Update
Tax Cut and Jobs Act

4. Agenda Tax Cut and Jobs Act Discussion Time Corporate tax
Pass-through income
General business changes
Individual tax
Discussion Time
Today we’ll go over the major changes taking place for the 2018 tax year as a result of the Tax Cut and Jobs Act. We’ll discuss some general changes affecting all businesses, as well as the specific changes relating to corporations, pass-through entities, and individuals. We’ll try to leave time at the end for questions and general discussion, but feel free to ask questions as we go.
2018 Tax Update
Tax Cut and Jobs Act

5. Tax Cut and Jobs Act OMG! Signed into law on December 22, 2017
Tax year beginning 1/1/18
Early adjustments
Bonus Depreciation – 9/27/17
2025 Sunset
…mostly
Talking points:
OMG is this complicated. Complexity of the new legislation, biggest change in the tax code since 1986
Will need guidance on a lot of this from the IRS
Will affect everyone in the room
Big changes for contractors
Most of these changes are temporary as of now, and are set to sunset after 2025
2018 Tax Update
Tax Cut and Jobs Act

6. 21% Corporate Tax Rate Permanent(ish) change New Corporate Rate:
Corporate Rate was: $0 - $50,000 15% $50,001 – $75,000 25% $75,001 - $100,000 34% $100,001 – $335,000 39% $335,001 - $10,000,000 34% $10,000,001 - $15,000,000 35% $15,000,001 - $18,333,333 38% $18,333,334 and over 35%
New Corporate Rate:
21%
Talking points:
Flat tax rate is great for profitable C-corps, lousy for those making less than $50K
Change entity? It really depends, should discuss with tax advisor. Tax rate is potentially lower, but double taxation does still exist. If you never take anything out of the business, and your individual rate is higher than 21%, then…maybe. If you take cash out with any regularity, then you’ll be paying tax at the corporate level and the individual level, likely greater than the 21%. Definitely not a “slam dunk”.
2018 Tax Update
Tax Cut and Jobs Act

7. Corporate Tax Corporate AMT is gone
Blended rate for fiscal year corporations.
Effect on Financial Statements
Calculation of tax provisions
Deferred tax assets/liabilities remeasured
2018 Tax Update
Tax Cut and Jobs Act

8. Pass-through Income – Section 199A
Income taxed at individual level – No change
Not taxed at flat 21%
Qualified Business Income Deduction (QBID)
Lesser of 20% of QBI or 20% of taxable income less capital gains
Subject to certain limitations
Ridiculously complex calculation
Maximum business tax of 29.6%
Talking points:
S-corps, partnerships, and sole-props still taxed at individual level, NOT subject to the 21% tax rate
Calculation is very complex – still waiting on guidance from the IRS for practical application
Deduction is limited to 50% of related W-3 wages. However, if you have a real estate holding company without wages, you will be allowed the deduction, limited to the original basis of property plus 2.5%
2018 Tax Update
Tax Cut and Jobs Act

9. Qualified Business Income
“The net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” - IRS
Only items included in taxable income
Excludes:
Capital gains and losses
Certain dividends
Interest income
Talking points:
Deduction taken at individual level, you will not see it on your 1065 or 1120S, but instead on your Below the line deduction taken from taxable income, so it won’t affect SE tax.
Certain additional limitations will phase in based on individual taxable income.
Again – very complex
2018 Tax Update
Tax Cut and Jobs Act

10. Qualified Trade or Business
Any business except:
Specified service trade or business
IF taxable income is greater than $315,000 MFJ
Deduction phased out at $415,000 MFJ
Applies to related party activities (i.e. self rental)
Employee wages
Specified service trade or business includes: fields of health, law, accounting, actuaries, performing arts, consulting, athletics, financial services, investing and investment management, trading, etc.
2018 Tax Update
Tax Cut and Jobs Act

11. Section 199A Limitations
If taxable income is greater than $315,000 MFJ, deduction is limited to the greater of:
50% of W-3 wages
25% of W-3 wages plus 2.5% of unadjusted cost basis of property, plant, and equipment
2018 Tax Update
Tax Cut and Jobs Act

12. Depreciation Section 179 Bonus Depreciation Maine $1 million deduction
$2.5 million threshold
Expanded definition of qualified property
Bonus Depreciation
100% for all property acquired after 9/27/18
New and used property
Maine
Talking points:
Section 179 increased to $1M with a $2.5M threshold. The definition of property qualified for 179 has also been expanded to include certain improvements made to nonresidential real property, including any improvements made to the interior of a business that is not attributable to the enlargement of the building or the internal structural framework. Qualified property now includes items such as roofs and HVAC.
Bonus is 100% for all property acquired after 9/27/18 and now can be taken on both new and used property
Bonus change is temporary, only through 2022 as of right now.
Maine is conforming to Section 179 but decoupling from Bonus, but allowing the Maine Capital Investment Credit on assets for which bonus depreciation was taken.
2018 Tax Update
Tax Cut and Jobs Act

13. Small Contractor Threshold
Small Contractor: Increased from $10m average annual receipts to $25m.
Not required to use the percentage-of-completion method of accounting.
Exempt from look-back*
263A threshold increased
Home-builders
Talking points:
POC, c2c still required for contracts lasting longer than 2 years.
Just because you can do something doesn’t mean you should, discuss with your tax advisor.
Look-back still applies for AMT purposes and contracts lasting longer than 2 years
If you aren’t using the POC method and are therefore subject to 263A uniform capitalization rules (homebuilders?), that threshold has increased as well with the new legislation.
2018 Tax Update
Tax Cut and Jobs Act

14. Net Operating Losses Carried forward only, indefinitely
Only able to reduce 80% of taxable income in any given year.
Only applies to losses generated in 2018 and beyond.
Talking points:
No more carrying NOLs back to the preceding two years and getting a check in the mail
No more completely wiping out next year’s income
2018 Tax Update
Tax Cut and Jobs Act

15. Interest Expense Limitations
30% of adjusted taxable income
Carried forward
Small taxpayers exempt from limitation
Limited at taxpayer level
Talking Points:
Amount of interest deductible will be limited to 30% of adjusted taxable income, with remaining interest carried forward indefinitely.
This only applies to taxpayers with greater than $25M in average annual receipts.
Limitation will be at the 1040 level.
2018 Tax Update
Tax Cut and Jobs Act

16. Additional Business Changes
Domestic Production Activity Deduction (DPAD) is gone.
Like-kind exchanges for real property only
Entertainment expense no longer deductible
Talking points:
The 9% DPAD is gone. For those of you that were claiming 100% of income as qualified for this deduction, you’re losing this 9%, gaining a 20%...
Going forward, you will recognize gains and losses on vehicles traded in for new ones, instead of that amount being buried in the basis of the new asset.
Entertainment expenses will no longer be deductible, even at 50%.
2018 Tax Update
Tax Cut and Jobs Act

17. Qualified Opportunity Zones
Sweet
Potential gain deferral
Potential gain exclusion
Investment in 32 low income communities designated by the State of Maine
Like Kind Exchange “on Steroids”
2018 Tax Update
Tax Cut and Jobs Act

18. Individual Tax Rate
MFJ was: $0 - $18,650 10% $18,651 – $75,900 15% $75,901 - $153,100 25% $153,101 – $233,350 28% $223,351 - $416,700 33% $416,701 - $470,000 35% $470,001 and over 39.6%
New MFJ rate:
$0 - $19, %
$19,051 – $77, %
$77,401 - $165, %
$165,001 – $315, %
$315,001 - $400, %
$400,001 - $600, %
$600,001 and over %
Talking points:
Brackets have expanded
Most marginal rates have been lowered
Top rate at 37%
2018 Tax Update
Tax Cut and Jobs Act

19. Itemized Deductions Standard deduction increased to $24,000 MFJ
Deductible taxes
Limited to $10,000
Deductible Interest
Mortgage acquisition debt reduced to $750,000 on new mortgages.
HELOC interest is non-deductible
Talking points:
70%-94% of taxpayers will now use the standard deduction instead of itemizing
For those that do itemize, taxes are now limited to $10,000
2018 Tax Update
Tax Cut and Jobs Act

20. Itemized Deductions Deductible medical expenses
10% threshold reduced to 7.5%
2% Miscellaneous deductions – gone
Unreimbursed employee business expenses
Investment expenses
Legal fees
Hobby expenses
Tax Preparation
2018 Tax Update
Tax Cut and Jobs Act

21. Additional Items for Individuals
Alimony – not included for new divorces
Personal exemptions – gone
Child tax credit increased from $1,000 to $2,000 per child, with up to $1,400 refundable
Affordable care act
Individual mandate eliminated, penalty is gone in 2019
Talking points:
Alimony not included in income or expenses for all new divorces
No more personal exemptions
No more Obamacare penalties
AMT exemption and phase-out amounts increased. For the most part, very very few individuals are likely to be subject to AMT going forward.
2018 Tax Update
Tax Cut and Jobs Act

22. Additional Items for Individuals
AMT exemption and phase-out amounts increased
Almost non-existent
Kiddie tax
Taxed at rates applicable to trusts and estates
Moving expenses
Only for members of the armed forces
Reimbursements included in income
2018 Tax Update
Tax Cut and Jobs Act

23. So much change! Overwhelming amount of change
Majority of taxpayers will see tax savings
Guidance still needed
Talking points:
Lots and lots of changes, and potential. Talk to your accountant.
At the end of the day, there should be savings
We are still waiting on guidance from the IRS on a lot of this
2018 Tax Update
Tax Cut and Jobs Act

24. Thank You!
Questions?