1. Individual / Corporate Tax Update November 15, 2018
Chris McElroy, CPA
Schneider Downs & Co., Inc.
Dr. K. Bryan Menk, Associate Professor
Duquesne University

2. Agenda Individuals Pass-through Entities Corporations
Business Provisions
Qualified Opportunity Zones
Planning Hot Topics

3. Federal Tax Update
Individuals

4. Federal Tax Update – Individuals
Tax Rate Changes
Standard Deduction and Personal Exemptions
Itemized Deductions
State and Local Taxes
Mortgage Interest
Miscellaneous Itemized Deduction
Child and Dependent Tax Credit
Kiddie Tax
Section 529 Plans

5. Federal Tax Update – Individuals

6. Federal Tax Update – Individuals
Standard deduction increased (2018 – 2025)
$12,000 (S)
$24,000 (MFJ)
Personal exemptions repealed (2018 – 2025)

7. Federal Tax Update – Individuals

8. Federal Tax Update – Individuals
State & local income & property taxes (2018 – 2025)
Combined limit of $10,000
Limit does not apply to property taxes paid in connection with a trade or business

9. Federal Tax Update – Individuals
12,000
15,000
10,000

10. Federal Tax Update – Individuals
Itemized deductions modified (2018 – 2025)
Mortgage interest deduction - debt limit reduced from $1M to $750k
Charitable contributions limit increased to 60% of AGI
Casualty loss deduction limited to federally-declared disasters
Deduction for medical expenses – threshold reduced from 10% to 7.5% of AGI (2017 – 2018)
Itemized deductions repealed (2018 – 2025)
Interest on home equity loans
Miscellaneous itemized deductions
3% Itemized Deduction Limitation repealed (2018 – 2025)

11. Federal Tax Update – Individuals
Child and Dependent Tax Credit
Child tax credit increased to $2,000 (2018 – 2025)
Refundable portion limited to $1,400
Phase-out increased from $110K to $400K (MFJ)

12. Federal Tax Update – Individuals
Section 529 Plans
Effective January 1, 2018, qualified withdrawals for federal tax purposes have been expanded to include up to $10,000 in tuition, per year, per beneficiary, in connection with enrollment or attendance at public, private, or religious elementary or secondary schools.
Pennsylvania allows a deduction for contributions to any state plan

13. Federal Tax Update – Individuals
Alternative Minimum Tax (2018 – 2025)
Exemption increased
$109,400 (MFJ)
$70,300 (S)
Phase out threshold increased
$1,000,000 (MFJ)
$500,000 (S)

14. Federal Tax Update – Individuals
2017
2018
Salary
$150,000
Standard Deduction
$12,700
$24,000
Exemptions
$8,100 $0
Taxable Income
$129,200
$126,000
Tax
$23,778
$19,599
Decrease in Tax
$4,189
% Decrease in Tax
17.6%

15. Federal Tax Update – Individuals
2017
2018
Salary (3 children)
$150,000
Standard Deduction
$12,700
$24,000
Exemptions
$20,250 $0
Taxable Income
$117,050
$126,000
Tax
$20,740
$19,599
Child Tax Credit
$1,000
$6,000
Net Tax Liability
$19,740
$13,599
Decrease in Tax
$6,141
% Decrease in Tax
31.1%

16. Federal Tax Update – Individuals
2017
2018
Salary (3 children)
$200,000
Taxes (State and Local and Real Estate)
$27,000
$10,000
Mortgage Interest
Charitable Contribution
$2,000
Itemized Deductions
$39,000 $0
Standard Deduction
$24,000
Exemptions
$20,250
Taxable Income
$140,750
$176,000
Tax
$26,665
$30,819
Child Tax Credit
$6,000
Net Tax Liability
$28,762
$24,819
Decrease in Tax
$3,943
% Decrease in Tax
13.71%

17. Federal Tax Update – Individuals
Estate and Gift Taxes (2018 – 2025)
Lifetime exclusion doubled
$11.2M for 2018 ($22.4M for married couples)
Basis step-up retained
40% tax rate remains unchanged
Gift tax
Annual exclusion maintained
$15k for 2018
Planning implications – make gifts before expiration of law on 12/31/25

18. Pass-through Entities
Federal Tax Update
Pass-through Entities

19. Federal Tax Update – Section 199A
Deduction for Qualified Business Income – Section 199A (2018 – 2025)
20% deduction from income of partnerships, S-Corps and sole proprietorships
Limited to the greater of:
50% of W-2 wages paid by the business, or
25% of W-2 wages plus 2.5% of unadjusted basis of depreciable property
Determined for each separate business (i.e., no aggregation of wages among commonly-controlled entities)
Overall limitation - 20% of taxable income in excess of capital gains
Deduction is from adjusted gross income but is not an itemized deduction, so is available to all taxpayers

20. Federal Tax Update – Section 199A
Deduction for Qualified Business Income – Section 199A (2018 – 2025)
Deduction is not available to “specified service businesses”
Health, law, accounting, consulting, athletics, performing arts, financial, investment and brokerage services
Principal asset is the reputation or skill of one or more of its employees or owners
Exemption from limitations for taxpayers with taxable income less than $315,000 (MFJ) or $157,500 (S)
Wage limitation does not apply
Prohibition against specified service businesses does not apply
Exemptions are phased out for income between $315,000 and $415,000 (MFJ), or $157,500 and $207,500 (S)

21. Federal Tax Update – Section 199A
Type of Business
Taxable Income (MFJ) Less than $315,000
Taxable Income (MFJ) between $315,000 and $415,000
Taxable Income (MFJ) Greater than $415,000
Specified Trade or Business (i.e. a Service Business)
199A Deduction allowed without limitation
199A Deduction is reduced according to the percentage of income that exceeds Taxable Income Threshold
$0 deduction
Qualified Trade or Business (i.e. Non-Service Business)
199A Deduction subject to being decreased (possibly down to $0) depending on W-2 wages and qualified property
199A Deduction calculated as the lesser of (1) 20% of Taxable Income or (2) the greater of 50% of W-2 Wages or (b) 25% of W-2 Wages plus 2.5% of qualified property

22. Federal Tax Update – Section 199A
2017
2018
Schedule C Income
$300,000
Self Employment Tax Deduction
$11,904
$11,997
Standard Deduction
$12,700
$24,000
Exemptions
$8,100 $0
Qualified Business Income Deduction
$52,801
Taxable Income
$267,296
$211,202
Regular Tax
$63,546
$39,267
Self-Employment Tax
$23,807
$23,994
Additional Medicare Tax
$243
Net Tax Liability
$87,475
$63,504
Decrease in Tax
$23,971
% Decrease in Tax
27.4%

23. Federal Tax Update – Pass-through Entities
Partnerships - Carried Interest
Net long-term capital gain with respect to an “applicable partnership interest”
Treated as short-term capital gain for investments sold by the partnership that have been held for three years or less
Applicable partnership interest
Transferred to or held by taxpayer in connection with the performance of services (e.g., a profits interest) in an “applicable trade or business”
Applicable trade or business
Securities
Commodities
Real estate held for rental or investment
Cash or cash equivalents, and
Options and derivatives with respect to any of the above

24. Federal Tax Update – Pass-through Entities
Partnerships – Repeal of Technical Termination Rule
Repeals technical termination rule under IRC Section 708(b)(1)(B)
Applied when 50% or greater interest in the partnership was sold
Partnership now only terminates under Section 708(b)(1)(A) if no part of business is carried on by any of the partners
Welcome change for tax preparers
No more surprise short-year returns
No restart of depreciation
Effective for tax years beginning after 12/31/17

25. Federal Tax Update
Corporations

26. Federal Tax Update - Corporations
Corporate tax rate – 21% (flat rate) beginning in 2018
No special rate for personal service corps
AMT – repealed
Minimum tax credit
50% refundable (2018 – 2020)
100% refundable (2021)
Election to claim minimum tax credits in lieu of bonus depreciation – repealed

27. Federal Tax Update - Corporations
Dividends-received deduction modified
70% deduction reduced to 50%
80% deduction reduced to 65%
Tax-free contributions to capital to exclude:
Contributions in aid of construction
Contribution by a customer or potential customer
Contribution by a government entity (non-shareholder)
Applies to contributions made after 12/22/17
Corporate provisions are permanent

28. Federal Tax Update
Business Provisions

29. Federal Tax Update – Business Provisions
Depreciation
Bonus depreciation
100% for qualified property placed in service after 9/27/17 and before 1/1/23
Must be first use by the taxpayer (need not be new)
Decreasing percentages for years 2023 – 2026
Depreciation caps on luxury autos increased
All “qualified improvement property” was not assigned a 15-year life by the final bill; therefore, it does not qualify for bonus
Excludes any assets with floor-plan financing debt

30. Federal Tax Update – Business Provisions

31. Federal Tax Update – Business Provisions

32. Federal Tax Update – Business Provisions

33. Federal Tax Update – Business Provisions

34. Federal Tax Update – Business Provisions
Depreciation
Section 179 expense
Expensing limit increased to $1M
Investment limitation of $2.5M
Expansion of eligible qualified real property
Lodging restriction (179(d)(1)) removed
Effective for tax years beginning after 12/31/17
Made permanent and adjusted for inflation

35. Federal Tax Update – Business Provisions
Accounting Methods (tax years beginning after 12/31/17)
Options for all businesses with average gross receipts less than $25M for the prior three years
Use of cash method of accounting
Inventory accounting - exemption from Section 471
Account for as non-incidental materials and supplies, or
use same method as financial statements or books and records
Exemption from Section 263A
Contractors - exemption from percentage-of-completion method for contracts to be completed within two years (adopt on a cut-off basis)

36. Federal Tax Update – Business Provisions
Interest Expense
Deduction limited to interest income plus 30% of “adjusted taxable income”
Adjusted taxable income = taxable income before interest expense, NOLs and depreciation and amortization (e.g., EBITDA)
Exclusion for floor plan interest
Exclusion for investment interest
Elective exclusion for interest from a real property trade or business, election requires the use of ADS for depreciation of assets
Exemption for businesses with average gross receipts under $25M for prior three years
Unused amounts can be carried forward indefinitely

37. Federal Tax Update – Business Provisions
Interest Expense
Special rules for partnerships and S-corps
Limitation is determined at the entity level
Disallowed interest is passed through and treated by the owners as interest expense paid in the next succeeding year, and can only be used to the extent that the entity has “excess taxable income” in future years
“Excess taxable income” of the entity must first be applied to carryforward interest expense, and is then available to offset other interest expense
Owner’s distributive share of income from a pass-through entity not included in determining “adjusted taxable income” (prevents double counting)
Effective for tax years beginning after 12/31/17

38. Federal Tax Update – Business Provisions
Net Operating Losses
General repeal of NOL carryback except for farming and property insurance businesses
Unlimited carryforward period
NOL deduction limited to 80% of taxable income
Applies to NOLs arising in taxable years beginning after 12/31/17
Carryforwards and carrybacks originating from earlier years are unaffected

39. Federal Tax Update – Business Provisions
Excess business losses of individuals not allowed
“Excess business losses” are defined as:
Aggregate deductions from all trades or businesses in excess of aggregate gross income plus $500k (MFJ)
For partnerships and S-corps, the rules are applied at the partner/shareholder level
Passive activity limitations are applied first
Disallowed amounts are treated as NOL carryovers
Applies to taxable years

40. Federal Tax Update – Business Provisions
Miscellaneous business provisions
Like-kind exchanges
Only allowed for real property
Transitional rule provided for personal property relinquished or acquired prior to 12/31/17
R&D expenses
Mandatory five-year amortization (15 years for foreign R&D)
Also applies to software development expenses
Mid-year convention applies
Effective for R&D expenses incurred after 2021

41. Qualified Opportunity Zones
Federal Tax Update
Qualified Opportunity Zones

42. Federal Tax Update – Qualified Opportunity Zones

43. Federal Tax Update – Qualified Opportunity Zones
New Sections 1400Z -1 and 1400Z-2
1400Z-1 deals with creating and designation of zones.
1400Z-2 deals with the benefits to taxpayers
Goal
Designed and created to attack poverty and improve economically distressed areas by spurring economic development and job creation is distressed communities.
Congress hopes to achieve this by potentially unlocking large amounts of capital through the use of tax incentives available for investing in designated areas. It’s estimated there is $6.1 trillion of unrealized gains sitting as paper profits in the hands of corporations and individuals and that some portion of this would be put to work to revitalize these communities.
Rather than through government handouts of taxpayer dollars, investors will directly invest money into projects they believe will succeed with the tax benefit attraction of permanently excluding a portion of existing gains and all future gains (assuming holding period requirements are met).

44. Federal Tax Update – Qualified Opportunity Zones
1400Z-2 Special Rules For Capital Gains Invested in Opportunity Zones
Three Main Benefits
Deferral of current realized gain
Permanent exclusion of up to 15% of current gain
Replacement property held 5 (10%) and 7 years (additional 5%)
Permanent exclusion of 100% of future appreciation
Replacement property held more than 10 years
Two Main Investor Requirements
Realized capital gain stemming from sale to unrelated party
Proceeds reinvested within 180 days into an “Opportunity Fund”
Direct investment by an individual in qualified opportunity zone property will not work

45. Federal Tax Update – Qualified Opportunity Zones
What is an Opportunity Fund?
A partnership
A corporation (“C” or “S”)
Formed for the purpose of investing in qualified opportunity zone property
Who can form an Opportunity Fund?
Anyone
Individuals
Investment and Real Estate Promoters
Tax Exempt Organizations
What does the Opportunity Fund invest in?
Opportunity zone business
Stock or partnerships operating a qualified opportunity zone business in a qualified zone

46. Year-end Planning Considerations
Federal Tax Update
Year-end Planning Considerations

47. Federal Tax Update - Planning Hot Topics
Impact of increased standard deduction – will itemized deductions exceed standard deduction?
Any benefit for mortgage interest or charitable contributions?
Use of donor advised funds for charitable contributions
Accounting method change opportunities (receipts < $25M)
Cash basis
Inventories/263A
Long-term contracts
Review impact of interest expense limitations – debt / equity structures
Planning and structuring to maximize the 20% deduction for pass-through entities
Use of Qualified Opportunity Zones

48. Federal Tax Update - Planning Hot Topics
S-corp vs. C-corp?
S-corp
Maximum all-in fed tax rate is 29.6%
80% x 37%
C-corp
Maximum all-in fed tax rate is 39.8%
21.0% corp
18.8% on dividend (79% x 23.8%)

49. Federal Tax Update
Questions?