Planning for the New Tax Law - PA

PLANNING FOR
THE NEW TAX LAW
TAX REFORM

BUSINESS
PASS-THROUGH ENTITIES
INTERNATIONAL
TABLE OF CONTENTS
INDIVIDUALS
CORPORATE

INDIVIDUALS
Presented by: James Revels

TAX RATE CHANGES
Pre-Reform
2018 Pre
Change Tax Rate Tables
Post Reform 2018 Tax Rate Tables
Rate Single Married Rate Single Married
10% $0-$9,325 $0-$18,650 10% $0-$9,525 $0-$19,050
15%
$9,326-
$37,950
$18,651-
$75,900
12%
$9,526-
$38,700
$19,051-
$77,400
25%
$37,950-
$91,900
$75,901-
$153,100
22%
$38,701-
$82,500
$77,401-
$165,000
28%
$91,900-
$191,650
$153,101-
$233,350
24%
$82,501-
$157,500
$165,001-
$315,000
33%
$191,651-
$416,700
$233,351-
$416,700
32%
$157,501-
$200,000
$315,001-
$400,000
35%
$416,701-
$418,400
$416,700-
$470,700
35%
$200,001-
$500,000
$400,000-
$600,000
39.6% $418,401-up $470,700-up 37% $500,000 up $600,000-up 4

IMPACT ON NYS RESIDENT AT VARIOUS INCOME LEVELS
Income Level Federal Tax (decrease)
400,000 (19,000)
500,000 (18,000)
750,000 (4,000)
1,000,000 (5,000)
2,000,000 (16,000)
3,000,000 (4,000)
Assumes $10,000 of dividends, $40,000 Real Estate Tax, Two Children
5

IMPACT ON NYC RESIDENT AT VARIOUS INCOME LEVELS
Income Level Federal Tax (decrease)/increase
400,000 (19,000)
500,000 (18,000)
750,000 2,000
1,000,000 9,000
2,000,000 13,000
3,000,000 40,000
Assumes $10,000 of dividends, $40,000 Real Estate Tax, Two Children
6

THINGS THAT ARE GONE
• Personal Exemptions
• State and Local Income and Property Tax-$10,000 exception
• Miscellaneous Itemized Deductions
o Tax Preparation Fees
o Investment Advisory Fees
o Employee Business Expenses
o Moving Expenses
o Entertainment Expenses (not Meals)
• Personal Casualty Losses
• Moving Expenses
• Shared Responsibility Payment (2019)
• Alimony Taxability and Deduction (2019 Agreements)
• Gambling expenses in excess of net winnings
7

THINGS THAT HAVE CHANGED
• Interest Expense
o Mortgages
• Home Mortgages In Existence on December 15, 2017—no changes
• Post 12/15/17 home acquisition interest deduction limited to principal amounts of
$750,000. Second homes continue to qualify.
• Refinances post 12/15/17 grandfathered at $1 million ONLY up to debt level at date of
refinance. (No cashing out of equity).
o Home Equity Line of Credit
• Interest allowed on HELOC only to extent proceeds were used to acquire, construct or
substantially renovate property.
• EXAMPLE-$200,000 HELOC used in 2016 to buy $100,000 car and $100,000 to repair and replace
roof on home. In 2018 interest on roof repair only deductible.
8

THINGS THAT HAVE CHANGED
• Medical Expenses deductible to extent they exceed 7.5% of Adjusted Gross Income, down from
10%.
• Charitable Contributions to Public charities limit increased from 50% of AGI to 60% of AGI
• Standard Deduction almost doubled to $24,000 for married couple.
o Timing of Deductions
• Child Credit Increased to $2,000 per child and $500 per non child dependent
o Credit fully available until AGI reaches $400,000. ($200,000 single).
o Up to $1,400 refundable if tax liability is zero.
• Stock Option Income recognition from grants by private companies can be deferred for five years
• Business losses limited to $500,000 per year. Any excess carried forward as Net Operating Loss.
• Net Operating Losses cannot be carried back. Can be carried forward indefinitely
o Use of losses limited to 80% of taxable income for post 2017 losses.
9

ALTERNATIVE MINIMUM TAX
• An alternative tax system that disallows many deductions and taxes income at a lower rate
(For 2017: 28% vs 39.6%).
• Taxpayer pays the higher of the two computations.
• Currently (2017 and prior) the largest disallowed expenses for AMT are state and local income and
real estate taxes and miscellaneous itemized deductions.
10

ALTERNATIVE MINIMUM TAX – 2018 VERSION
• For 2018 28% vs 37%
• AMT exemption increased
• With state and local taxes and miscellaneous itemized deductions repealed, the largest cause of
AMT eliminated
• Anticipation is that many who were hit with AMT in the past will no longer be so.
11

BUSINESS
Presented by: Michael Kline

GENERAL BUSINESS PROVISIONS
Limitation of Business Interest Deduction:
• Business interest expense limited to:
o Business interest income plus 30% of adjusted taxable income for the year and
o Floor financing interest of the taxpayer
• Adjusted taxable income is taxable income excluding:
o Any income, gain, deduction or loss that is not allocable to a trade or business,
o Business interest income and interest deduction
o NOL deduction
o 20% pass-through deduction or
o For years before January 1, 2022, depreciation, amortization and depletion
• Small business exception
o $25 million gross receipts
o Attribution rules apply
o Does not apply to “tax shelters”
• Carryforward period of disallowed interest is unlimited 13

• Pass-Through Entities
o Applied at entity level
o Carryforwards allocated to owners
• Real estate trade or business opt out
o Irrevocable election
o Change in depreciable lives
o Bonus depreciation no longer available for real property
• Things to consider…..
o Make election year after purchase of large real estate asset
o Entities with real estate and non real estate activities
• Can they opt out entirely or a portion?
o Does opt out election affect existing assets being depreciated?
14

DEPRECIATION CHANGES
Section 179
• Effective for tax years beginning after December 31, 2017
• Increased from $510,000 to $1,000,000
• Phase out increased from $2,030,000 to $2,500,000
• Maximum deduction of $25,000 for sport utility vehicles remains the same
• Qualified real property is expanded to include roofs, HVAC property, fire protection, and alarm
and security systems.
15

Bonus Depreciation
For qualifying assets acquired and placed in service after September 27, 2017 and before January 1,
2023:
• 100% first year deduction for assets with depreciable life of 20 years or less
• Assets can be new or used (cannot be acquired from a related party)
• Does not apply to assets acquired that have a carryover basis
• Cannot be taken if ADS depreciation is used
16

Things to consider…………….
Bonus vs Section 179
• State differences
• Trade or business income limitation – section 179
• No limitation on bonus depreciation
• Neither one has AMT adjustment
• Bonus must be taken on a whole class of assets
• Qualified Improvement Property
17

Qualified Improvement Property (“QIP”)
• Elimination of reference to qualified leasehold improvement property, qualified restaurant
property and qualified retail improvement property
• QIP needs to meet two requirements:
o Made to the interior portion of a non-residential building
o Placed in service after the date the building is placed in service
• Depreciable life is 39 years until technical correction is made
• Ability to take bonus depreciation after December 31, 2017 depends on depreciable life
18

• Employer Deduction for Fringe Benefit Expenses limitations
• Exclusion of Entertainment Expense deduction
• Increased gross receipts threshold to $25 million
o Cash method of accounting
o Accounting for inventories
o UNICAP
o Accounting for small construction contracts
• Like-Kind Exchange limitation
19

CORPORATE
Presented by: Brett Dubin

CHANGES TO CORPORATE TAXES
• Corporate tax rates reduced
o 21% flat tax rate for tax years beginning in 2018 (vs. 35% max tax rate in 2017)
o 21% tax rate also applies to Personal Service Corporations
• Dividends received deduction percentages reduced
o If the corporation owned at least 20% of the stock of another corporation, an 80% dividends
received deduction was allowed.
• For tax years beginning after Dec. 31, 2017, the 80% dividends received deduction is
reduced to 65%
o If the corporation owned less than 20% of the stock of another corporation, a 70% dividends
received deduction was allowed.
• For tax years beginning after Dec. 31, 2017, the 70% dividends received deduction is
reduced to 50%.
21

• Corporate Alternative Minimum Tax (“AMT”) repealed
o Old law: Corporate AMT was 20% with an exemption amount of $40,000
o For tax years beginning after 2017, the AMT is repealed
o Prior AMT credit is refundable and can offset regular tax liability in an amount equal to:
• 50% of the excess of the minimum tax credit for the tax year over the amount of the credit
allowable for the year against regular tax liability
o This increases to 100% for 2021
22

• Modification of Net Operating Loss (“NOL”) Deduction
o For tax years ending on or before 12/31/2017
o NOL may generally be carried back 2 years
o NOL carried forward 20 years
o For tax years beginning after 12/31/2017
• 2 year carryback is repealed
• NOL deduction is limited to 80% of taxable income
• NOL can be carried forward indefinitely
o Property and casualty insurance companies can carryback NOL two years and carryover 20 years
• The 80% limitation does not apply to property and casualty insurance companies
23

• Repeal of Domestic Production Activities Deduction (Section 199)
o Old Domestic Production Activities Deduction law:
o 9% maximum allowable deduction from taxable income for eligible activities performed in
U.S.
o Eligible activities: manufacturers, construction, engineering & software development
companies
o Repealed for tax years beginning after December 31, 2017
24

• Research & Experimentation (“R&E”) expenses
o Under the old law:
• Taxpayers could elect to deduct 100%
• Forgo a current deduction and amortize over the useful life of the research (not less than
60 months);
• Or elect to recover them over 10 years
o For taxable years beginning after 2021:
o Specified R&E expenses are required to be amortized over a 5-year period (15 years if
outside the U.S.)
• Excluded - Exploration expenses incurred for ore or other minerals (including oil and gas)
o R&E credit survives
25

• Limitation of Excessive Employee Compensation
o Under the old law: $1 million limit deduction for covered employees of publicly held
corporations
o However, exceptions applied for:
• Commissions
• Performance-based remuneration (i.e. stock options)
• Payments to a tax-qualified retirement plan
o Under the new law (for tax years beginning after Dec. 31, 2017):
• Repeal of the exception to the $1 million deduction limitation for commissions and
performance-based compensation
26

Choice of Entity-Rate Differences: New Tax Bill for a Pennsylvania Entity
27
TOP MARGINAL
ENTITY FORMULA TAX RATE
Passive C Corp Shareholder
Corp Fed Rate (21%) + PA Corp Rate (9.99%) + (69.01%*(Qualif Div Fed/PA Rate
23.07%) + NII Rate (3.8%))) 50.71% 1
Active C Corp Shareholder (90%*21%) + (90%*9.99%) + (62.11%*(20%+3.8%)) + (10%*(37%+3.8%+3.07%)) 47.06% 1, 2
Passive Partner (No Wages) Individual Fed Rate (37%) + NII (3.8%) + Individual PA Rate (3.07%) 43.87% 3
Passive Partner (Enough Wages for 20% Passthrough Deduction) (100% - [199A dedution (100%*20%)] * (37%+3.8%) + PA (3.07%) 35.71%
Active Partner (No Wages) ((90% - [199A dedution (90%*0%)] * 37%) + (10%*(37%+3.8%)) + PA (3.07%)) 40.45% 4
Active Partner (Enough Wages for 20% Passthrough Deduction) ((90% - [199A dedution (90%*20%)] * 37%) + (10%*(37%+3.8%)) + PA (3.07%)) 33.79% 4
NOTE: This analysis does not include the sale of assets/company which results in a
double taxation for C Corps.
1 Assumes that all after tax earnings are distributed.
2 Assumes 10% of income is paid as compensation to shareholder.
3 The scenerios without any employee wages also represent the top marginal rate for specified service businesses.
4 Assumes a 100% partner.

PASS-THROUGH ENTITIES
Presented by: Matt Lakofsky & William Briggs

WHICH TAXPAYERS QUALIFY FOR THE DEDUCTION?
29
Anyone who has taxable income of less than 315,000 MFJ and 157,500 for all other
taxpayers the deduction will be the lesser of 20% of the Qualified Business Income
(“QBI”) or taxable income. Up to these income thresholds both qualified businesses
and specified service businesses are entitled to the 199A deduction.
Once taxable income exceeds these limits there is a further limitation on the
deduction based on 50% of the W-2 wages paid by the business.
OR
25% of the w-2 wages paid plus 2.5% of the adjusted basis of all qualified property

WHICH TAXPAYERS QUALIFY FOR THE DEDUCTION?
There is little guidance available as to which industries qualify.
However, the following specified services will not qualify if income exceeds certain thresholds:
• Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial
services, brokerage services, or
• Any trade or business where the principal asset of such trade or business is the reputation or
skill of one or more of its employees or owners (this potentially can limit many other service
businesses).
The following business entities should qualify for the deduction:
• Real Estate (potential issues with net lease entities)
• Manufacturers
30

DEDUCTION LIMITATION
Combined qualified business income is computed as follows:
1. The SUM OF
The LESSOR OF:
a. 20% of the taxpayers “qualified business income (defined below)” OR
2. The GREATER OF: (alternative analysis involved when income is above various thresholds)
a. 50% of the W-2 wages with respect to the business, OR
b. 25% of the W-2 wages with respect to the business PLUS
2.5% of the unadjusted basis of all qualified property
2. PLUS the LESSOR OF:
a. 20% of qualified cooperative dividends, OR
b. Taxable income less net capital gain
31

SECTION 199A
Qualified Business Income:
The term ‘qualified business income’ means qualified income from a pass through entity or an
individual or in other words anyone but a C Corporation, starting for any taxable year starting on or
after 1/1/18.
QBI is the net amount of qualified items of income, gain, deduction, and loss with respect to any
qualified trade or business of the taxpayer. The term ‘qualified items of income, gain, deduction, and
loss’ means items of income, gain, deduction, and loss to the extent such items are effectively
connected with the conduct of a trade or business within the United States.
32

SECTION 199A
Qualified Business Income does not include:
Short of Long Term Gain or Loss
Dividends
Interest income not included in a trade or business
Guaranteed payments or reasonable S Corporation compensation
REIT dividends (because they are ordinary) – Qualify
33

What Constitutes Wages
W-2 wages are defined as total wags subject to wage withholding, elective deferrals and
deferred compensation.
What are not W-2 wages?
• Wages not properly included in a return filed with the Social Security
• Amounts paid to independent contractors.
• Amounts paid for by a related party on behalf of another entity such as management fees
for example a group of related companies where only 1 company has payroll.
34

What Constitutes Property
Qualified Property is defined as any depreciable property that is USED in the trade or
business AND owned at the end of the year.
Assets are qualified assets up until the later of the assets regular depreciation life or 10
years. Again the later of the two dates.
35

EXAMPLES
• Mickey, an attorney, makes $500,000 in his sole proprietor legal
practice, a service business. Mickey does not get the
deduction. This is because he is above the ceiling of $207,500
for an individual’s taxable income related to service providers.
He is fully phased out of section 199A.
• Minnie, who is an attorney, and makes $100,000 in her sole
proprietor law practice. She does not pay any wages . She gets
a Sec. 199A deduction of $20,000 deduction equal to 20% of
taxable income. Because her taxable income is below
$157,500, she is not subject to the specified service restriction
and is not subject to the wage limitation.
36

EXAMPLES
• Jack and Jill, own an S corporation and sell buckets that generates
$500,000 of QBI and has $220,000 of wages. All wages are paid to
themselves. Assume taxable income is in excess of $415,000. The Sec.
199A deduction, of $100,000, is calculated as follows:
• Lesser of 20% of QBI ($100,000) or
• 50% of wages ($110,000)
• Jack and Jill, own a partnership and sell buckets and generates $500,000
of QBI and has $220,000 of guaranteed payments paid to themselves. No
wages. Assume taxable income is in excess of $415,000. The Sec. 199A
deduction, of $0, is calculated as follows:
• Lesser of 20% of QBI ($100,000) or
• 50% of wages ($0)
37

INTERNATIONAL
Presented by: Jennifer Sklar-Romano

INTERNATIONAL TAX REFORM PROVISIONS
• Modified Territorial Tax Regime
o Adoption of dividend participation exemption system
o U.S. corporate shareholders of specified foreign corporations (SFC) allowed a full deduction
against the foreign-source portion of dividends received
• 100% dividends received deduction (DRD)
• SFC = 10%-owned foreign corporation (not including a PFIC that is not a CFC)
• Applies only to C corporations
• Individual and pass-through shareholders continue to be subject to the existing world-wide
tax regime
o U.S. shareholder must hold the stock of the SFC for more than 1 year
o Foreign tax credits disallowed for any dividend to which the DRD applies
o Subpart F and Section 956 investment in U.S. property rules continue to apply to certain CFC
shareholders
o Exception for hybrid dividends
• Hybrid dividend = amount received from a CFC for which the CFC received a tax
deduction or other tax benefit
39

• Mandatory Repatriation Tax
o The IRS has issued guidance on the application of the toll tax in notices 2018-13 and 07
o One-time toll tax on undistributed nonpreviously taxed foreign earnings and profits (E&P)
o Pre-2018 accumulated deferred E&P MUST be included as Subpart F income
o Income inclusion for 2017 tax year
• Absent current IRS guidance, payment due with extension
o Toll tax applies to ALL U.S. shareholders of a SFC that is also a deferred foreign income
corporation (DFIC)
• In contrast to the DRD, which is available only to corporate U.S. shareholders, the toll tax
applies to all U.S. shareholders, including individuals, partnerships/LLCs, S corporations
and trusts
• Deferral allowed for S corporations until a triggering event occurs
• U.S. shareholder = U.S. person owning 10% of the vote of a DFIC
• DFIC = any SFC of a U.S. shareholder that has accumulated post-1986 deferred foreign
income greater than zero
40

• Mandatory Repatriation Tax (con’t)
o E&P measurement date greater of E&P on Nov. 2, 2017 or Dec. 31, 2017
• Accruals after November 2 will not be taken into account in computation of E&P – e.g.,
foreign taxes accrue at year-end, so they will reduce E&P only at December 31
measurement date
o Allocation of E&P deficits permitted
• E&P deficits of SFCs are allocated pro rata among the DFICs based upon the ratio of each
DFIC’s positive E&P over total positive E&P
• Allocation will impact which DFIC’s deemed paid foreign tax credits may be used to
offset the toll tax
o Payment is due over 8 years
• No interest
• 8% for first 5 years, then 15%, 20% and 25% for years 6 through 8, respectively
41

• Mandatory Repatriation Tax (con’t)
o Tax Rates
• Corporations - 15.5% on cash/cash equivalents and 8% on noncash assets
• Individuals- 17.54% on cash/cash equivalents and 9.05% on noncash assets
o 3.8% Net Investment Income Tax (NIIT) applies for actual distributions
• Not subject to 8 year pay-out
o May elect to be taxed at corporate rates on Subpart F income inclusion
• Foreign cash position includes aggregate cash positions of all SFCs, not just DFICs
o Fiscal year CFCs could possibly get a one-year break (Prop. Reg. §1.898-1(c)(1))
o Taxpayers can elect to preserve NOLs
o Disallowance for specific portion of foreign tax credit (FTC)
• Disallowed FTC rate of 55.7% to 77.1% based upon U.S. shareholder’s ratio of the
aggregate foreign cash position to the total Subpart F inclusion
o State tax ramifications?
• No current state guidance allowing 8 year pay-out
42

• Modifications to Subpart F anti-deferral regime
o Expansion of U.S. Shareholder definition to include value as well as vote
o Downward attribution from foreign persons to related U.S. persons
o Repeal of 30-day minimum holding period
• Global Intangible Low-Taxed Income (GILTI)
o Applies to U.S. shareholders of CFCs
o Treated as Subpart F income
o Refers to shareholder’s net CFC tested income over shareholder’s net deemed tangible
income return
o 80% deemed paid foreign tax credit is available
o Separate foreign tax credit basket applies
o U.S. corporate shareholders allowed a deduction for 37.5% of its foreign-derived intangible
income and 50% of its GILTI
43

• Base Erosion Anti-Abuse Tax (BEAT)
o Aimed at preventing companies from stripping out U.S. earnings via deductible payments to
foreign affiliates
o Applies to C corporations with average annual gross receipts of at least $500,000,000 for the
three preceding tax years and a “base erosion percentage” of at least 3%
o BEAT is equivalent to the excess of 10% ( 5% for 2018) of “modified taxable income”
(generally, regular taxable income plus the base eroding payments such as interest and
royalties) over its regular tax liability as reduced by credits
• Sale of partnership interest by U.S. non-residents
o Rev. Rul. 91-32 position codified in response to taxpayer-friendly Tax Court decision in Grecian
Mining case (currently under Appeal by the IRS)
o Nonresidents selling an interest in a U.S. partnership will be taxable on the gain as deemed
attributable to ECI
o Hypothetical sale mandated as if the U.S. partnership sold all of its assets
• 10% WHT imposed on gross proceeds
o FIRPTA rules continue to apply to gain from the sale of real estate held by a U.S. partnership
o Effective for sales after Nov. 26, 2017, however, WHT requirement only applies to dispositions
after Dec.31, 2017 44

• State tax ramifications – NYS preliminary report
• Planning Considerations
o Conversion to C corporations for DRD eligibility
o Incorporation of foreign branches
o Restructuring to avoid applicability of Subpart F regime (e.g., check-the-box planning)
o Leveraged blocker structures
45

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