Tax Reform: Key Changes and New Provisions

Thrive. Grow. Achieve.
Tax Cuts and Jobs
Act - Highlights
Mitra Mamdouhi, Partner
Jane Horn, Partner
1/23/18

TCJA-Highlights / Page 2
COURSE UPDATE DATE: JENNIFER SCALES-MOORE
COURSE REVIEWED BY: DEBRA HILDRETH
COURSE REVIEW DATE: 1/19/18
NASBA FIELD OF STUDY: TAX

CONTRIBUTORS
JANE BROOKS HORN, CPA – Partner
MITRA MAMDOUHI, CPA – Partner
DEBRA HILDRETH, CPA – Director
REBECCA OBEN, CPA – Manager
JENNIFER SCALES-MOORE – Manager

PROGRAM CONTENT
Major Tax Law Changes Under Tax Cuts And
Jobs Relief Act As It Pertains To:
– Individuals
– Corporations
– Pass-Through Entities
– Estates and Trusts

LEARNING OBJECTIVES
At the end of this course you will understand and
be able to discuss the major tax developments
affecting individuals, businesses and trusts and
estates.

INDIVIDUALS
Rates, Exemptions, Etc.:
•New income tax rates & brackets – There are still seven
brackets but the rates on some of these brackets have
been lowered. The new rates are effective for tax years
beginning after December 31, 2017 through December
31, 2025 - see attached schedules, these amounts will
be adjusted for inflation.

INDIVIDUALS

INDIVIDUALS
Rates, Exemptions, Etc.:
• Standard deduction - This amount has essentially been
doubled. For single filers the standard deduction has
increased from $6,350 to 12,000 and for married couples filing
jointly, it has increased from $12,700 to $24,000.
• Personal exemptions - Previously taxpayers could claim a
$4,050 personal exemption for themselves, their spouse and
each dependent. This deduction had been eliminated under
the new law.
• Kiddie Tax – Under prior law, a child’s investment income over
$2,100 was subject to tax at the parents’ tax rate. Beginning in
2018, these earnings will be taxed at the rates that apply to
estates and trusts. Those rates for 2018 range from 10% on
income up to $2,550 and 37% over $12,500.

INDIVIDUALS
EXAMPLE:

INDIVIDUALS
Itemized Deductions:
• State and local tax (SALT) deduction:
–A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for
married taxpayer filing a separate return) for the aggregate of:
• 1. State and local property taxes not paid or accrued in carrying on a trade or
business, and
• 2. State and local income, (or sales taxes in lieu of income taxes) paid or accrued in
the taxable year.
• Mortgage interest:
–In the case of taxable years beginning after December 31, 2017, and
beginning before January 1, 2026, a taxpayer may treat no more
than$750,000 as acquisition indebtedness ($375,000 in the case of married
taxpayers filing separately) . In the case of acquisition indebtedness
incurred before December 15, 2017 this limitation is $1,000,000 ($500,000
in the case of married taxpayers filing separately).
• Home Equity Interest:
–For taxable years beginning after December 31, 2017, a taxpayer may not
claim a deduction for interest on home equity indebtedness.

INDIVIDUALS
• Medical expense:
–For taxable years beginning after December 31, 2016 and before January 1,
2019, the threshold for deducting medical expenses is 7.5% of AGI for all
taxpayers.
• Charitable contributions:
–An increase in the income-based percentage limit for certain charitable
contributions by an individual taxpayer of cash to public charities and certain
other organizations from 50 percent to 60 percent.
• Miscellaneous itemized deductions:
–All miscellaneous itemized deductions are no longer allowed, this includes
tax preparation and investment fees.
• Overall limitation:
–The new law repeals the overall limitation on itemized deductions.

INDIVIDUALS – OTHER CHANGES
Other Adjustments:
• Alimony Deduction By Payor/Inclusion By Payee Suspended:
–Deduction for alimony and separate maintenance payments and inclusion of the
payments in gross income are repealed
–Effective for divorce or separation agreements executed or modified after 2018
–Modifications of agreements executed before January 1, 2019 must expressly
provide repeal of the alimony rules apply
• Repeal Of ACA Individual Mandate:
–Effective for months beginning after December 31, 2018
–Amount owed by any taxpayer under the individual health insurance mandate for
lack of minimum health insurance for themselves and their dependents is zero
–Individual mandate began in 2014 and imposed a penalty on individuals for each
month they failed to maintain minimum essential coverage
–No other Affordable Care Act provision is affected and certain employers are still
required to offer their employees minimum essential coverage

Individual AMT Retained, With Higher AMT Exemption Amounts:
–Exemption amount and phaseout threshold for individuals temporarily increased
for years 2018 through 2025
–Regular tax deductions repealed, already not deductible for AMT
• State and local tax deduction
• Miscellaneous itemized deduction
–AMT exemption amounts (adjusted annually for inflation)
• $109,400 for married filing jointly (previously $84,500)
• $70,300 for single or head of household (previously $54,300)
Child Tax Credit Increased; Partial Credit For Non-child Dependents:
–Temporarily expanded for tax years 2018 through 2025
–Credit amount increased to $2,000 per qualifying child (previously $1,000)
• Qualifying child must not have attained the age of 17 by the end of the year
–$500 nonrefundable credit for qualifying dependents other than children
(previously no credit)
–The maximum amount refundable may not exceed $1,400 per qualifying child
–AGI threshold for credit phaseout
• $400,000 for married filing jointly (previously $110,000)
• $200,000 for single or head of household (previously $75,000)

Estate And Gift Tax Retained, With Increased Exemption
Amount:
–Basic exclusion amount for the federal estate and gift taxes is
doubled from $5 million to $10 million (before adjustment for
inflation) temporarily for decedents dying and gifts made for tax
years 2018 through 2025
–Inflated amount for 2018 is 11.2 million
–This period provides the opportunity for individuals with large
estates to make gifts, especially if they had used up their existing
exclusion amounts
–Will the states follow suit?

CORPORATE
Corporate Income Tax Rate:
–21% Flat Rate
–No Special Rate For Personal Service Corporations
Alternative Minimum Tax:
–Repealed For Tax Years Beginning After December 31, 2017.
–Minimum Tax Credit Is Refundable In Tax Years 2018 Through 2021.

CORPORATE
Exclusions From Contributions To Capital:
Exceptions from tax-free corporate capital contributions were expanded
to include:
–Any contribution in aid of construction from a customer or potential
customer,
–Any contribution by a governmental entity or civic group.
Municipal tax abatements to a business to locate in a municipality are not
capital contributions and are not taxable.

OTHER BUSINESS CHANGES
Excess business loss:
Excess business losses for noncorporate taxpayers are not allowed
for the tax year
Excess business loss = excess of taxpayer’s aggregate deductions for tax
year attributable to the taxpayer’s trades or businesses over sum of:
–Taxpayer’s aggregate gross income/gain for the tax year attributable to those
trades or businesses, plus
–$250,000 ($500,000 for joint return)

Excess business loss:
Excess business loss incurred during a tax year is treated as a net
operating loss carryforward in later tax years.
–Applies to all aggregate income and deductions from all of a taxpayer’s trades or
businesses.
–Combine all such income and deductions from both spouses on a joint return.
Ordering rules:
1st – apply passive loss rules
2nd – apply excess business loss rules

Example:
Spouses R and T file a joint return. R and T each have a
separate trade or business.

•Partnerships & S corporations – excess business
loss rules apply at the partner/shareholder level
•Rules apply to noncorporate taxpayers for tax
years beginning after 12/31/2017 and before
01/01/2026.

Business Interest Deduction Limitation:
Business interest deduction limit =>
30% adjusted taxable income + business interest income
Disallowed business interest expense carries forward indefinitely (except for
partnerships and s corporations).
Exceptions:
Small businesses - 100% business interest is deductible if average annual
gross receipts for 3 prior tax years is less than $25 million.
Real property trade or business may elect out if it uses ADS depreciation
methods on real property.
Partnerships And S Corporations:
Business interest deduction limit is determined at the entity level.
Excess business interest and excess taxable income are passed through to
partners/shareholders for offset in future years.

Net Operating Loss:
• NOL carryforward for an indefinite period
• NOL carryback is eliminated except for farm losses and certain
insurance companies
• NOL deduction = lesser of
–Total NOL carryforwards to the tax year plus NOL carrybacks to the tax
year; or
–80% of taxable income, computed without regard to the NOL deduction

Modifications To Taxable Income To Compute NOL
For Current Tax Year:
• No deduction for 20% of qualified business income
• No deduction for foreign-derived intangible income
• No deduction for capital losses in excess of capital gains
• Sec 1202 50% gain exclusion on sale of small business stock held for at
least 5 years is not allowed
• Nonbusiness deductions limited to nonbusiness income
• Corporate dividends received deduction is computed without regard to
percentage limitations
Please note: There are additional rules for farming businesses and
insurance companies

Other Adjustments:
• Domestic production activities deduction repealed
–The domestic production activities deduction under Code Sec. 199 is
repealed for tax years beginning after 2017
• Like-kind exchange treatment limited
–Like-kind exchanges are allowed only for real property after 2017
–Like-kind exchanges are no longer allowed for depreciable tangible
personal property and intangible and non-depreciable personal property
after 2017
• Five-year write-off of specified research or experimentation expenses
–R&D expenditures paid or accrued after 2021 must be amortized ratably
over five years
–Software development costs are treated as R&D expenditures for purposes
of the amortization provision
–R&D expenditures attributable to foreign research are amortized over 15
years
–Current law through 2021 allows current expensing of R&D
–R&D credit remains unchanged

Business Deductions:
• Meals and Entertainment
–No deduction for entertainment expenses paid or incurred after December 31,
2017.
–Business meals are still 50% deductible.
• Employer-provided Meals
–50% deductible for expenses paid or incurred after December 31, 2017 and
before January 1, 2026.
–Nondeductible after December 31, 2025.
• Transportation And Commuting Benefits:
–No deduction for any qualified transportation fringe benefits paid or incurred after
December 31, 2017.
• Deductions Permitted:
–Expenses necessary to ensure the employee’s safety.
–Qualified bicycle commuting benefits that are includible in the employee’s gross
income (during tax years 2018 – 2025).

Excess Employee Compensation Deduction Limit:
Generally, public companies may not deduct compensation over
$1 million for covered employees.
–Regarding the definition of “publicly held corporation”, the conference
committee report for the TCJA states “[t]he proposed definition may
include certain additional corporations that are not publicly traded,
such as large private C or S Corporations.”
 Tax Cuts and Jobs Act expanded the definitions of compensation and
covered employees that are subject to the deduction limits.
 Performance-based compensation and commissions are included in
total compensation subject to the deduction limit.

Covered Employees Include:
• Principal Executive Officer (PEO), or individual acting in such capacity,
at any time during the year,
• Principal Financial Officer (PFO), or individual acting in such capacity, at
any time during the year,
• Three (3) highest compensated officers other than the PEO and PFO,
• Any covered employee for any tax year beginning after December 31,
2016,
• Any compensation paid to an employee’s estate or beneficiary after the
employee’s death, or to an ex-spouse under a qualified domestic
relations order.

Business Tax Credits:
•Rehabilitation credit limited
–20% credit for qualified rehabilitation expenditures for certified historic
structures is now claimed ratably over a five-year period instead of all
in the year placed in service beginning in tax year 2018
–10% credit for qualified rehabilitation expenditures for non-historic
structures first placed in service before 1936 is eliminated beginning in
tax year 2018

Accounting Method:
• Cash method of accounting
–A simplified $25 million gross receipts test beginning with tax year
2018 to determine whether taxpayers are:
• Able to use the cash method of accounting
• Not required to capitalize inventory
• Not required to apply the UNICAP rules
• Not required to use percentage of completion method for small construction contracts
–Taxpayer must apply for a change in accounting method on form 3115
to adopt any of the new methods

PASS-THROUGH ENTITIES
New Deduction For Pass-through Income:
•New IRC sec 199A – qualified business income
Beginning in 2018 (until 2025) a 20% deduction is allowed for
qualified business income (QBI)
•Deduction is allowed for taxpayers other than C
corporations – which includes –
–Unincorporated businesses/sole proprietorships
–Individual owners of partnerships
–Individual owners of S corporations
–Trusts and estates

The amount allowed as a deduction is the sum of:
The lesser of:
–Combined qualified business income amount –
• 20% of qualified business income (QBI) – plus
• 20% of qualified REIT dividends and qualified publicly traded partnership
income – or –
–20% of the excess of taxable income over net capital gains
Plus the lesser of:
–20% of qualified cooperative dividends – Or –
–Excess of taxable income over net capital gains

The amount allowed as a deduction is further limited to
the excess of:
50% of the W-2 wages of the business– or –
The sum of –
–25% of W-2 wages, plus
–2.5% of the unadjusted basis of tangible, depreciable property
(including real estate) the depreciable period for which has not
ended

Exceptions – The Deduction Is Not Allowed For:
• Service businesses – any trade or business where the principal asset is
the reputation or skill of one or more individuals – for example, the
fields of health, law, accounting, actuarial science, performing arts,
consulting, athletics, financial services, brokerage and investment
management services
• Architects and engineers are specifically excluded from the definition of
service businesses

The service business exception
and the 50% of W-2 wages/2.5%
of tangible property limitations
do not apply if taxable income
is–
• Below $315,000 for married individuals
filing joint (phased out between
$315,000-$415,000)
• Below $157,500 for other individuals
(phased out between $157,500-$207,500)
20% deduction reduces taxable income (not allowed in
computing adjusted gross income or AGI)

EXAMPLE:

Repeal Of Partnership Technical Termination:
Beginning in 2018, new tax law repeals technical terminations
under code sec 708(b)(1)(b)
Under prior law, a partnership was considered terminated
(requiring filing of a separate return) if, within any 12-month
period, there was a sale or exchange of 50% or more of interests
in the partnership

Carried Interests - New Holding Period Requirement:
• A carried interest is a profits interest generally received in exchange for
services
• Beginning in 2018, a 3-year holding period is required for capital gain
treatment

COST RECOVERY
Increased Code Section 179 Expensing:
The provision modifies section 179 to:
• Increase the maximum amount a taxpayer may expense to $1 million
(currently $500,000) for taxable years beginning before January 1, 2023;
• Increase the phase-out threshold amount to $2.5 million (currently $2
million) for taxable years beginning before January 1, 2023;
• Index the amounts for inflation after 2018, and
• Expand the definition of qualified real property to include qualified
energy efficient heating and air-conditioning property acquired and
placed in service by the taxpayer after November 2, 2017
• Maximum amount for SUV’s over 6,000 lbs. remains $25,000 but will be
indexed after 2018

COST RECOVERY
Temporary 100% Cost Recovery Of Qualifying Business
Assets:
Allows full and immediate expensing of short-lived
capital investments for five years.
–Acquired and placed in service after September 27, 2017 and before
January 1, 2023
–No longer required to be “original use property” however it must be the
taxpayers’ first use

COST RECOVERY
First-year bonus depreciation:
100% bonus depreciation would apply to qualified property
acquired and placed in service on or after September 28, 2017.
For the 2017 tax year, taxpayers can choose to simplify their bonus
depreciation calculation by electing to apply 50% bonus depreciation to all
assets placed in service that year in lieu of applying 50% bonus to assets
placed in service before September 28, 2017 and 100% bonus to assets
placed in service on or after September 28, 2017.
• In later years, the first-year bonus depreciation deduction phases down, as follows:
– 80% for property placed in service after December 31, 2022 and before Jan. 1, 2024.
For certain property with longer production periods, the beginning and end
dates in the list above are increased by one year. For example, bonus first-year
depreciation is 80% for long-production-period property placed in service after
December 31, 2023 and before January 1, 2025.
First-year bonus depreciation sunsets after 2026.

COST RECOVERY
Recovery Period For Real Property Shortened:
• Qualified improvement property (QIP) is any improvement to an
interior portion of a building that is nonresidential real property if
such improvement is placed in service after the date such building
was first placed in service.
–QIP placed in service after December 31, 2017, is generally
depreciable over 15 years using the straight-line method and half-year
convention, without regard to whether the improvements are property
subject to a lease, placed in service more than three years after the
date the building was first placed in service, or made to a restaurant
building.
Qualified improvement property does not include any expenses attributable to the
enlargement of the building, an elevator or escalator, or the internal structural framework
of the building. These types of additions must be depreciated over the life of the
underlying business.

COST RECOVERY
Depreciation Limits Of Listed Property:
• Section 280F has been amended to increase the annual depreciation
limits on passenger autos placed into service after December 31, 2017,
leading to annual limits of:
–$10,000 for the 1st year,
–$16,000 for the 2nd year,
–$9,600 for the 3rd year,
–$5,760 for each remaining year in the recovery period.
–The taxpayer is then entitled to deduct $5,760 each year until the auto is
fully depreciated.

COST RECOVERY
Recovery Period For Real Property Shortened:
• For property placed in service after December 31, 2017, the ADS
recovery period for residential rental property is shortened from 40
years to 30 years.
• For tax years beginning after December 31, 2017, an electing
farming business— I.E., A farming business electing out of the
limitation on the deduction for interest—must use ADS to depreciate
any property with a recovery period of 10 years or more.

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