Post on 11-Mar-2021
transcript
BUSINESS TAX
STRATEGIES IN
THE NEW TAX
ENVIRONMENT
The Impact of
Tax Cuts and Jobs Act (TCJA)
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PRESENTERS:
PHOTO
Dan FalesShareholder
PHOTO
Tony SchweierShareholder
Agenda
• Change in Entity Structure
• Section 199A – Qualified Business Income
Deduction
• Leasehold Improvement Depreciation Issue
• Limitation on Excess Business Losses for
Non-Corporate Taxpayers
• International Changes
• Entertainment Expenses
• Opportunity Zones
• Investor Incentives at a Glance
• Qualified Opportunity Fund
• Qualified Opportunity Zone
Temporary
Provisions
It is important to note that the
Tax Cuts and Jobs Act has
sunset dates on many of its
provisions. Most sunset at the
end of 2025.
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New Corporate
Tax Rate
The TCJA changes the “C”
corporate tax rate to a flat 21%.
Corporate AMT is repealed.
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Change in Entity Structure?A variety of factors affect the decision by an individual to hold a business as a
corporation or a partnership (or other flow-through entity) including (i) the fact that the
income of a corporation is taxed twice (once at the corporate level and then again upon
a distribution by the corporation or a sale of the stock of the corporation), (ii) the relative
tax rates imposed on various types of income received by corporations and individuals,
(iii) the fact that it is generally not possible to remove appreciated assets from a
corporation without triggering tax on those assets, (iv) the tax consequences resulting
from a sale of the business, (v) the application of employment-related taxes and the so-
called Medicare tax under Section 1411, and (vi) the possibility of future changes in law
(including tax rates).
Our expectation is that these changes in rates will not fundamentally change an
individual’s determination in deciding whether to hold a business as a corporation or a
partnership (or other flow-through entity).
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S Corporation vs C Corporation
S Corporation C Corporation
Taxable Income 1,000,000$ 1,000,000$
State and Local Income Tax Non-Deductible 45,000$ -$
1,045,000$ 1,000,000$
199A Deduction 200,000$ -$
845,000$ 1,000,000$
Federal Tax at 37% 312,650$
Federal Tax at 21% 210,000$
Federal Tax on Ordinary Dividend (20%) -$ 158,000$
Federal Tax for ACA(3.8%) -$ 30,020$
Projected after tax Cash Flow 642,350$ 601,980$
Effective Tax Rate 35.77% 39.80%
NOTE: Your stock basis is increased by undistributed S corporation earnings but not if you own a C corporation.
Small Business
Deduction Limitation
Threshold amount means $315,000 if filing
joint ($157,500 single) of taxable income. If
you are below the threshold you get the
deduction without limitation.
If you are over the threshold the deduction
phases out for certain specified businesses.
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Section 199A – Qualified
Business Income Deduction
Proposed Regulations under IRC §199A were issued by TreasuryThe First Set of Guidance after Enactment(We’re hoping to get more in January of 2019!)
Six Proposed Regulations:
Prop. Reg. §1.199A-1 Operational Rules (includes defining terms)
Prop. Reg. §1.199A-2 Determination of W-2 Wages and UBIA of Qual. Prop.
Prop. Reg. §1.199A-3 Qualified Business Income (QBI), Qual. REIT Div and Qual. PTP Inc.
Prop. Reg. §1.199A-4 Aggregation Rules
Prop. Reg. §1.199A-5 Specified Service Trade or Business
Prop. Reg. §1.199A-6 Special Rules for Relevant Passthrough Entity (RPE)(Think partnerships and S corporations)
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Section 199A – Qualified
Business Income Deduction
Key Aspects of Prop. Reg. §1.199A-1 [The operational rules]
Define a lot of key terms for purposes of calculating the 20% deduction.
Also, specifically lays out the calculation for computations for individuals and trusts below the threshold amount, Prop. Reg. §1.199A-1(c), and for individuals and trusts above the threshold amount, Prop. Reg. §1.199A-1(d).
One major term applicable to the 20% deduction is the term “trade or business.”A lot of time will be spent with clients discussing what is a trade or business. As the preamble to the proposed regulations states:
“Neither the statutory text of section 199A nor the legislative history provides a definition of trade or business for purposes of section 199A.”
The proposed regulations will use the definition of trade or business as defined under IRC §162 – which itself is not a model of clarity.
IMPORTANT: an individual can have multiple trades or businesses under the IRC!!!14
Section 199A – Qualified
Business Income Deduction
Additional Key Aspects of Prop. Reg. §1.199A-1 [Operational Aspects]
An individual is required to calculate the net Qualified Business Income (QBI) from each separate trade or business and then NET THE AMOUNTS OF ALL QBIs of the individual.
If there is a net loss from aggregate QBIs for a taxable year then the net loss is treated as a carryover to the next taxable year.
Another watch out as your looking at year-end tax calculations – the proposed regulations provide that the 199A deduction does not reduce your self-employment income under IRC §1402!
Adjusts the penalty for underpayment of tax under IRC §6662 for erroneous 199A deductions. The penalty threshold amount is reduced from the general rule of omitting 10% the tax due to 5% if the reduction is related to 199A.
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Section 199A – Qualified
Business Income Deduction
Prop. Reg. §1.199A-5 – Specified Service Trade or Businesses[What we were all waiting for!][But didn’t quite get….]
The general rule – “unless an exception applies, if a trade or business is an SSTB, none of its items are to be taken into account for purposes of determining a taxpayer’s QBI.”
This general rule must also be looked at for partnerships and S corporations. The reporting rules under Prop. Reg. §1.199A-6(b)(3) require the partnership or S corporation to make the determination as to whether its respective income is that of a SSTB and disclose this to the partners or S corporation shareholders.
The biggest exception – individuals and trusts with income below the threshold amounts are not subject to the restrictions imposed on SSTBs.
The biggest left unknown…..CONSULTING!
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“Expensing”
of Capital
Investments
The Tax Cuts and Jobs Act allows
businesses to immediately write off (or
“expense”) the cost of new investments in
depreciable assets other than structures
made after September 27, 2017, for the
next five years. This policy represents an
unprecedented level of expensing with
respect to the duration and scope of
eligible assets.
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Limitations on
Immediate Expensing
The law on immediate expensing has an
interplay with the new interest expense limitation
rules. If a real estate business wants to avoid
being subject to the interest expense limitation
rules then it makes an election to do so and in
making such an election the business gives up
the ability to immediately expense assets.
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Leasehold Improvement
Depreciation Issue1. On December 22, 2017, the President signed into
law tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the "New Act"). The New
Act was rushed through Congress in record time,
the result of which is that dozens of drafting
errors, oversights, and disconnects have been
discovered in the few months following its general
effective date of January 1, 2018.
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Leasehold Improvement
Depreciation Issue2. One of the most glaring errors relates to the period over which
various tenant improvements – can be depreciated under the New
Act. Prior to the enactment of the New Act, qualifying tenant
improvements could be depreciated over a period of 15 years. In
what was intended to be a simplification of the depreciation rules,
various forms of tenant improvements were combined in the New Act
into a single category of "qualified improvement property" or "QIP,"
which was intended to be eligible for a 15-year depreciation life.
However, due to what appears to be a drafting oversight, the New Act
was drafted without the language necessary to include QIP among
property eligible for a 15-year depreciation life, and thus it remains
subject to a 39-year depreciation life. This also means that QIP is not
eligible for 100% bonus depreciation under the New Act, which is only
available for property with a depreciable life of 20 years or shorter.
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Leasehold Improvement
Depreciation IssueThe New Act
3. Prior to the New Act, the following types of tenant improvements were
depreciable over a 15-year life (regardless of the term of the lease
and regardless of which party "owned" the improvements): (i)
qualified leasehold improvements, (ii) qualified retail improvement
property, and (iii) qualified restaurant property. Each of these assets
was defined in old Section 168(e)(6), (7) and (8) of the Internal
Revenue Code as it existed prior to the New Act. Each of these
categories of improvements was eliminated in the New Act. The only
remaining category of tenant improvements is "qualified improvement
property," defined in new Code Section 168(e)(6). The only
requirements for this category of improvements are: (i) an
improvement made to the interior portion of a nonresidential building,
and (ii) placement in service after the date the building is first placed
in service.
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Leasehold Improvement
Depreciation Issue4. While it is clear that the intent of Congress was a simplification of the
various tenant improvement categories into a single category of
qualified improvement property that would continue to be eligible for
depreciation over 15 years, the actual language of the statute does
not achieve the intended result-the link that would have allowed
qualified improvement property to be depreciated over 15 years was
overlooked and never inserted into the New Act. The result is that QIP
remains depreciable over 39 years.
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Business Interest
Deduction Limitation*1. Taxpayer's deduction of interest expense shall be limited
to 30% of adjusted taxable income for the taxable year.
2. Adjusted taxable income is EBITDA without including any
interest income, dividends or capital gains/losses. For tax years
beginning on or after January 1, 2022 adjusted taxable income
shall be EBIT.
3. Excess Business Interest (EBI) passes out to each
partner/shareholder and is deductible on their individual
return when they have Excess Taxable Income (ETI) from the
business.
*(only applies to companies with annual gross receipts in excess
of $25 million.)
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Electing Real Property
Trade or BusinessAn electing real property trade or business is a
business engaged in real property development,
redevelopment, construction, reconstruction,
acquisition, conversion, rental, operation,
management, leasing or brokerage.
Why is this distinction important?
If a real property trade or business makes the
election out of the interest expense limitation rule
then it cannot use the immediate expensing rules
and in fact has to depreciate its assets over
longer ADS depreciable lines.25
Limitation on Excess
Business Losses for Non-
Corporate Taxpayers
1. The law provides that the "Excess Business Loss"
of a non-corporate taxpayer is non-deductible in
the year it arises and becomes part of taxpayer's
NOL carryforward.
2. An excess business loss means a business loss in
excess of $500,000 (on a joint return).
3. The excess business loss rules are applied
only after applying Section 469.
4. An NOL resulting from an excess business loss
limitation is taken into account for purposes of the
determination of QBI in the year the NOL is used.
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Limitation on Excess
Business Losses for Non-
Corporate Taxpayers
5. The new law made following changes to NOL rules:
A) Eliminates carrybacks of NOLs
B) Limits the deduction of NOL carryovers to lessor
of carryover amount or 80% of taxable income
for the year
C) Eliminates 20-year cap on NOL carryovers
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International
International Changes in
General
• Moved from worldwide taxation regime to
territorial system with base erosion provisions
• 100% of foreign – sourced portion of
dividends paid by foreign corporation to U.S.
corporate shareholder owning 10% or more
of foreign corporation’s stock is exempt from
U.S. taxation
• No foreign tax credit or deduction allowed for
any foreign taxes paid or accrued on any
exempt dividend
• Untaxed accumulated foreign earnings
subject to one-time repatriation tax
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New Concepts
• Dividends Received Deduction
• Deemed Repatriation Tax
• Global Intangible Low-Taxed Income
(GILTI)
• Foreign-Derived Intangible Income (FDII)
• Base Erosion Anti-abuse Tax (BEAT)
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Global Intangible Low-Taxed
Income (GILTI)
• Applies to ALL U.S. shareholders, including noncorporate
shareholders
• Exception to new foreign dividends received deduction
exemption regime on foreign income earned by controlled
foreign corporation (CFC) offshored intangible assets
• GILTI rules use residual concept whereby perceived
excessive foreign profits are presumed to be derived from
intangible assets
• “Excess” income taxed at ordinary rates (21% for
corporations; 37% individuals)
• C corporations entitled to deduction
• Foreign tax credit offset available
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Entertainment
Expenses
The TCJA disallows deductions for
entertainment, amusement or recreation
activities under all circumstances. It would also
disallow transportation fringe benefits, benefits
in form of on-premises gym/athletic facilities or
for any personal amenities not directly related
to employer’s trade or business.
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Meals and Entertainment Changes Under Tax Reform
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2017 Expenses (Old Rules) 2018 Expenses (New Rules)
Office Holiday Parties
100% Deductible 100% Deductible
Entertaining Clients 50% Deductible Meals – 50% deductible
Event tickets, 50% deductible for face value of ticket; anything above face value is non-deductible
Tickets to qualified charitable events are 100% deductible
No deduction for entertainment expenses
Employee Travel Meals
50% Deductible 50% Deductible
Meals Provided for Convenience of
Employer
100% deductible provided they are excludible from employees’ gross income as de minimis fringe beneftis; otherwise, 50% deductible
50% Deductible (nondeductible after 2025)
Opportunity ZonesBackground
• The Opportunity Zones Program is based on a concept
developed by the Economic Innovation Group in 2015 to help
address persistent poverty and lack of businesses and jobs in
distressed communities
• Also a recognition that there are billions of dollars in
unrealized capital gains in stocks and mutual funds
• Original bill introduced in early 2017 with bipartisan support
as an effort to tap the unrealized gains for investments in
distressed communities
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Opportunity ZonesBackground
• The bill was included as part of the Tax Cuts and Jobs Act of 2017 enacted
December 22, 2017 and codified as new Code Sections 1400Z-1 and 1400Z-
2, and seeks to encourage economic growth and investment in designated
communities by providing federal income tax benefits to taxpayers who invest
in businesses located within the zones.
• Section 1400Z-1 provides for the designation of certain low-income
communities as qualified opportunity zones
• Section 1400Z-2 provides certain tax benefits for investments in these
qualified opportunity zones through investments in qualified opportunity
funds
• Until 10 days ago, there was only the statute and legislative history, with
limited IRS input, to provide guidance as to how these investments work
• On October 19, 2018, the IRS released proposed regulations, a revenue
ruling, updated FAQ's and a draft of a QOF certification form
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Investor Incentives
At a Glance
Temporary Tax Deferral
• Capital gains from the sale of assets can be
deferred until December 31, 2026 or the sale
of the new investment, whichever is earlier
Step-up In Basis
• After a 5-year hold we get to exclude 10%
of the original capital gain
• After a 7-year hold we exclude an
additional 5% - 15% total
Permanent Gain Elimination
• After a 10-year hold, investors get to
permanently exclude any capital gains tax
on the post-acquisition gains
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TIMELINE
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Comparison to1031 Exchange
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• An investment vehicle organized as a corporation or
partnership formed for the purpose of investing in
qualified opportunity zone property (other than another
QOF)
• Proposed regulations clarify that a taxpayer classified
as a corporation or partnership for tax purposes
(such as a limited liability company) may be a QOF
• Organizational documents should include a statement
of the entity’s purpose of investing in QOZ Property
• A QOF must file Form 8996 for the partnership or
corporation to self-certify that it is a QOF. On the Form
8996, the QOF must identify the first taxable year that it
intends to be a QOF, and may identify the first month.
Qualified Opportunity Fund
(QOF)
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• A QOF must hold at least 90% of its assets in
qualified opportunity zone property (“QOZP”)
• Generally, this is determined by the average
of the percentage of QOZP held on the last
day of the first 6 month period of the QOF’s
taxable year and the last day of QOF’s
taxable year
• A penalty is imposed for failing to meet 90%
investment standard
• Proposed regulations have provided
guidance on how to use the testing dates
• The investment in the QOF must be an equity
interest
Qualified Opportunity Fund
(QOF)
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• Qualified Opportunity Zone Stock
• Qualified Opportunity Zone
Partnership Interest
• Qualified Opportunity Zone Business
Property
Qualified Opportunity
Zone Property
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• Must be acquired after December 31, 2017
• Must be a QOZ Business, or is being organized to
be a QOZ Business
• Must remain a QOZ Business for substantially all of
the QOF’s holding period
QOZ Stock and Partnership
Interests(ACQUIRED BY THE QOF)
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A trade or business in which substantially all of the
tangible property owned or leased by the taxpayer is QOZ
Business Property
• The proposed regulations provide that, for this
purpose only, if at least 70% of the tangible property
owned or leased is QOZ Business Property, this
substantially all requirement is satisfied.
• At least 50% of the income of the QOZ Business is
derived from the active conduct of the trade or business
in the QOZ
• A substantial portion of the intangible property of the
QOZ Business is used in the active conduct of the trade
or business in the QOZ
• Less than 5% of the aggregate adjusted basis of the
QOZ Business Property is “non-qualified financial
property” (i.e. cash, debt, stock, partnership interests)
• The QOZ Business is not a “sin“ business
QOZ Business
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• Tangible property used in a trade or business
• Acquired by purchase from an unrelated party after
December 31, 2017 (less than 20% common
ownership)
• During substantially all of the QOZ Business holding
period, substantially all of the use is in a QOZ
• Original use of the property in the QOZ commences
with the taxpayer or the taxpayer “substantially
improves” the property
• Substantial improvement during any 30-month
period after acquisition, additions to basis exceed
an amount equal to the adjusted basis of such
property at the beginning of the period
QOZ Business Property
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What we now know:
• Existing land or a building will not be treated as original use
• The value of land will be excluded when calculating whether or the fund has doubled
its basis when substantially improving QOZ Business Property
Rev. Rul. 2018-29 Facts
• QOF A purchases for $800x Property X in 2018
• Property X consists of a building (40% or $320x) previously used as a factory
erected prior to 2018 and land (60% or $480x) on which the factory building is
located
• QOF A invests additional $400x in converting the building to residential property
within a 30-month period
• Thus, QOF A has substantially improved Property X because the additions to the
basis of the building ($400x) exceed an amount equal to QOF A’s adjusted basis of
the building at the beginning of the 30-month period ($320x)
We don’t know:
• How undeveloped land & buildings with plans to be demolished will be treated for
the substantial improvement test
Original Use or Substantial Improvement
Various Credits
• The TCJA retains the Work
Opportunity Tax Credit. (WOTC)
• The TCJA retains the R & D tax
credit.
• The TCJA retains the low income
housing tax credit.
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Partnership
Technical
Termination
Repeal
The TCJA repeals IRC
§708(b)(7)(B) “Technical
Termination“ rule.
Now if there is a more than 50%
change of ownership the
partnership is deemed to
continue.
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Like-Kind
Exchanges
The TCJA limits deferral
of gain on Like-Kind
Exchanges to real
property that is not held
primarily for sale.
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Tax Rules
Affecting Specific
Industries
Special tax regimes exist to govern the tax
treatment of certain industries and sectors.
The framework will modernize these rules to
ensure that the tax code better reflects
economic reality and that such rules provide
little opportunity for tax avoidance.
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Questions
Dan FalesShareholder
Tony SchweierShareholder
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THANK
YOU
Dan FalesShareholder
Tony SchweierShareholder