LJPR Financial Advisors Tax Reform Red Button Issues Creating a Safe Path Forward Tax Cuts and Jobs Act Tectonic Shift Profound changes to business taxes Ccorp rules changed Passthough rules changed massively ID: 760278
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Slide1
Leon C. LaBrecque, JD, CPA, CFP®, CFALJPR Financial Advisors
Tax Reform ‘Red Button’ Issues
Creating a Safe Path Forward
Slide2Tax Cuts and Jobs Act: Tectonic Shift
Profound changes to business taxesC-corp. rules changed Pass-though rules changed (massively)Small business changesDepreciation changesInterest changesLoss deductions (NOL and Excess Losses) changedRelevant remaining credits are R&D and low-income housing creditTerritorial taxDeemed repatriation of accumulated foreign earnings
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Individual taxes changed
Std. deduction increased
Itemized deductions limited
Child credit increased
Personal exemptions eliminated
AMT greatly reduced
Estate and
gift
changed
Estate and gift exemption amount doubled to $11.2M
Step-up basis retained
Slide3Issues for CPAs
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199A
Economic
Outcome
Planning
Business
Planning
Slide4Issues for CPAs
ClientsCommunicating new rulesCoordinating teamsCPALawyer(s)Other advisorsEconomics versus planning
Prospects Competitive advantageIndustry-specificREAgServiceMfgIntegrating Tax changes to planning
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Slide5Rate shift
Pre-TCJA, the corporate rate could be as high as 50.47% for shareholders (Corp/double tax dividends, UIIT)Pass-through max rate was 43.4%
TCJA, maximum corporate is 39.8%QSB (21% + 0%)?CFC?PHC?Max pass-through is now 29.6% - 40.8%
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Slide6Entity Choice Rates
Maximum Federal Tax Rates by EntityType of EntityPriorTCJAC- Corp shareholder50.47%39.8%Active pass-through owner, no QBI deduction39.6%37.0%Passive pass-though owner with no QBI deduction43.4%40.8%Active pass-through owner with QBI deductionN/A29.6%Passive pass-through owner with QBIN/A33.4%
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Slide71202 (QSBS)
Qualified Small Business Stock (QSBS) acquired after 09/27/2010, may be eligible for 100% exclusion on capital gains. Exclusion is greater of $10,000,000 or ten times the basis in the stock.Makes earnings-retained companies who can sell equity very attractive.
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Slide8Business Taxes: C-Corps
Giant change: rate is now flat 21%Personal Service Corporations (C-corps) are taxed at the 21% flat rate!Qualified small business (QSB) stock eligible for capital gain exclusion100% exclusionNon-service business (except engineers and architects)$10M gain limit
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QUESTIONS TO ASK:
Should I change my pass-through to a C-corp?
Is my service business over $315K(mfj) or $157.5K (all other) of income?
Can I use the QSB exemption?
Will I retain earnings in my trade or business?
Slide9More C-Corp
CFC now taxed at 21%, may warrant using ancient tax break from the 60s.CIT (MI) adds back bonus depreciation, Pass-through does not (no CIT).Losses trapped at entity level in C
C- corps unlimited SALTPass-throughs flow through SALT and limitedInternational operations favor C corps because of deduction for foreign derived intangible income
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Slide10Don’t
Ignore C-corp. opportunities:AccumulationQSBCFCJump to changing entityIgnore C change is permanent
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Slide11Business Taxes: Pass-Through
Definition: All trade or businesses not C-corp:S-CorpPartnerships (LLC taxed as partnership)Sole proprietorshipTrustsEstatesREITsMLPsEntity-by-entity evaluation: each pass-though is separate
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Basic idea is
that there
is a 20% deduction for pass-through
income
Service business exception
W-2 exception (50% of W-2 wages)
Property exception (2.5% of unadjusted basis + 25% of W-2 wages)
Income ‘exception to the exceptions’ on taxable income lower than $315k (mfj) or $157.5k (all others)
Slide12Don’t
Crack entities under the new regs.CPA firm owns building, spins it into separate LLC80%/50% test
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Slide13Pass-Through Income Exceptions
Married filing Joint: $315,000 of taxable income (24% bracket) Married filing separately: $157,500
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Single: $157,500Child (including a kiddie tax child): $157,500Non-grantor completed gift trust: $157,500Non-grantor incomplete gift trust: $157,500Estates: $157,500
W-2 rules, property basis rule or
service
business rules do not
apply.
Slide14C versus Pass-through?
Accumulate earnings, sell stock later C-corp.?Have losses, use pass-through?Under $157.5/$315, service business, use LLC/partnership?
Over $157.5/$315, non service business, use Sub-S?Over $157.5/$315. service business, use C-corp?Split businesses lines?
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Slide15Don’t
‘Crack’ entities under the new regs.Don’t ignore de minimum rules ($25M/10%).
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Slide16Pass-Through: The ‘Poor RIA’:
Gail is a single RIA, self-employed, earns net income from her practice of $150,000Her taxable income is about $128,000She gets a deduction of 20% of her taxable income, or $25,600Being in a service business doesn’t matter, since she has income under $157,500
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Slide17Pass-Through: The ‘Rich RIA’:
Gail, from our previous example, gets a nice case on December 12, 2018 and her income goes up by $80,000, to $230,000Her taxable income is about $208,000She loses her deduction and is in a higher bracketShe made more than $207,500Her bracket went way up (from 19.2%)
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She can get the deduction back by:
Possibly
using a 401(k) plan and employer contribution, she could put $55,000 ($61,000 if she’s over age 50).
She could make a charitable donation to her charity or to a donor advised fund.
Making the plan deduction saves her taxes on the deduction ($17,600) plus a QBI deduction of $
27,724.
Bracket shifts from 32% through the level and down to 19.2
%.
Slide18Pass-Through: Real Estate Tycoon
You can get a QBI deduction on real estate if you have basis in the property (not fully depreciated) 2.5% of the unadjusted basis is limitExample: Scrooge owns a property he bought in 2008 worth $5M. It generates about $400k of rental incomeHe will get a deduction for $80,000, since 20% of income is more than 2.5% of $5M
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Slide19Don’t
Ignore the new regs impose the (very) ugly standard of §162 to the definition of ‘trade or business’
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Slide20Pass-Through: Splitting with Trusts
Suppose Scrooge owns some fully depreciated property worth $5M that generates $500K of incomeNo pass-through deduction, since it is fully depreciatedHe sets up non-grantor trusts for each of his three nephews, spinning $100K each to themThey get pass-through, since the trusts get a $157,500 income exception
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Slide21Don’t
Use the same beneficiaries of multiple trusts or you run afoul of §678(e).Different beneficiaries and different provisions of multiple trusts.
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Slide22Pass-Through: Bigger Non-Service
Waldo runs a successful travel agency as a Sub-S corporationHe nets $800,000 in incomeHe pays wages of $120,000He would get the lesser of 20% of $800,000 ($160,000) or 50% of W-2 wages ($60,000), $60,000He could increase his deduction by paying himself so that 50% of total salaries equal 20% of QBI. Adding $142,500 to wages would generate a $132,500 QBI deduction
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Slide23Don’t
Forget the 2/7 rule on W-2 for 199A.
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Slide24Pass-Through: Shifting Debt
Bill and Melinda have rental real estate. It has a basis of $2M, is not fully depreciated and has gross annual rent of $100,000 and interest on a $1.5M note of $75,000Net is $25,000; QBI deduction is $5,000If they can pay-off or refinance the debt, the QBI deduction goes up to $15,000
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If they had bonds or cash, they could pay off the debt, save the $75,000 of interest (replacing the interest lost on the bonds) and garner a larger deduction.
If they used a pledged asset loan (or margin loan) with securities, they can still deduct the interest as investment
interest.
Slide25Pass-Through Planning Issues
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Am I subject to the pass-through rules? (Not C-Corp.)
Am I subject to the service company rules?Am I subject to the W-2 rules?Is my income under the threshold?Should I do something about my income?
We’re married and one of us has a pass-through. Are we better off filing separately?
Should we split off businesses to take better advantage of the new rules?
Should we split ownership to other members of our family or to trusts?
Slide26Don’t
Ignore the new rules on SSTB.Especially the narrow catch-all on skill of one or more owners or employees.
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Slide27QBI Deduction Planning
QBI is individual, not entityWages not included in QBIGuaranteed payment not included in QBIInterest, dividends and cap gains not include in QBI (generally)QBI on per pass-through, not combinedQBI losses carry over to QBI in subsequent yearsQBI allowed for AMT calc.Weird farm co-op rule
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OBSERVATION:
Entity selection will be critical
Wages to owner or spouse relevant
Gray service businesses
401(k) now Roth makes sense?
Non-qualified
deferred comp to reduce income?
Cash balance plans?
Full expensing to knock income down to levels?
Biz code important?
Depreciation
schedules?
Slide28Don’t
Ignore Roth 401(k) if income is below the limit.Ignore the usefulness of using deductions to TI if income over the limits:Charity401(k)HAS
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Slide29More Business Changes
Under $25 million 3-year average gross revenue:Cash basisNo debt restrictionsInventoryCompleted contractFull expensing of non-real estateNet operating losses: no carryback, limited carry-forwardNew excess loss limitation
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Entertainment deduction
eliminated
Car depreciation changed:
Under 6,000 pound GVW
Over 6,000 pound GVW
Interest deduction
limited
Slide30Don’t
Forget NOLs are not fully deductible.Ignore the Excess Loss Limitations.Forget to consider the interface of the 199A and full expensing deductions.
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Slide31Tax Cuts and Jobs Act
Individuals:Seven bracketsStd. deduction $12,200/$24,400>65 or blind: add’l $1,300 or $1,600Personal exemptions eliminatedChild credit increasedAMT limits increasedItemized deductionsMedical > 7½% AGISALT up to $10,000/$5,000PEASE repealedMisc. itemized repealedCharity AGI limit increasedMortgage int. modified529 expanded
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Taxable Income
Rate
Single
Married
10%
$0
- $9,525
$0 - $19,050
12%
$9,526-$38,700
$19,051-$77,400
22%
$38,701-$82,500
$77,401-$165,000
24%
$82,501-$157,500
$165,001-$315,000
32%
$157,501-$200,000
$315,001-$400,000
35%
$200,001-$500,000
$400,001-$600,000
37%
$500,000+
$600,000+
Slide32Itemized Deductions
Mortgage Interest:Pre-12/16/17 mortgages are grandfatheredRefinancing of grandfathered mortgages is grandfatheredNo deduction for equity loan interestNew mortgage interest on first and second residence mortgages are deducible up to a combined $750,000Medical: 7½% of AGI for 2017 and 2018SALT: $10,000/$5,000PEASE eliminated
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OBSERVATION:
Interest still deductible
Medical ‘bunching’ in 2018 makes sense
SALT ‘bunching’ with charity
Elimination of PEASE may help big charitable donations
Slide33Don’t
Forget to gather all your ‘bunches’ together.Forget SALT can be used by other entities, like Trusts or kids.Forget to check all 2018 clients for proximity to std deduction.
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Slide34More Individual Changes
Child credit increases to $2,000 with $1,400 refundablePhase out at $110,000 (single) or $400,000 (married)Capital gain exclusion on principal residence retained§529 expanded to K-12 private and religious schoolsCharity now limited to 60% of AGI instead of 50%Moving expenses gone
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OBSERVATION:
Child credit better for lower income bracket than deduction
§529 allows tax-free savings for K-12 and higher ed., replaces Coverdell
New standard deduction rules suggest ‘bunching’ charity over alternating years, or using Donor Advised Fund
CRT and CLT’s may be more prevalent
Slide35AMT
Retained but exemption amount increased to $109,400 (married) and $70,300 single2015: 91,450 returns w/AMT filed in MichiganMostly dead now
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OBSERVATION:
SALT (65.75% of preferences)
Personal exemptions (22.28% of preferences)
Misc. Itemized changes cautions (10.11% of preferences)
NOL (3.23% of preferences)
Slide36Don’t
Automatically assume a client in AMT in 2017 will still be in AMT.
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Slide37Alimony Changed
No deduction for alimony paid but alimony received not taxableEffective for divorces or modifications after 2018
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Slide38Tax Cuts and Jobs Act
Estate, gift and generation- skipping taxes:Exemption doubled, sunsets after 2025$11.2M lifetime exemption in 2018 (indexed for inflation annually) Step-up basis remainsExcise tax on private university endowmentsExcise tax on Non-profit executive salaries above $1M
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Slide39Don’t
Ignore estate taxes on client that may get over the $11M.Forget there are several elections between now and 2025.Allow wealth client to take adventure trips or have ’special drinks’ around the end of 2025.
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Slide40Child and Family Credit
Old rule: $1,000 credit per child under 17; phased out at $75K (S) and $110K (MFJ)New rule: $2,000 for child (refundable up to $1,400), $500 for non-child dependents (including taxpayers’ and others) (not refundable)New phase out starts: $200K(S, HOH, MFS) & $400K (MFJ) Earned income credit retained
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Slide41Don’t
Forget this is good for younger kids, but the 17+ now have no personal exemption.File single for college kids?
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Slide42Estate, Gift and GST Taxes
Doubles exclusion amount for estate, gift and generation-skipping taxesIncreased exclusion sunsets after 2025Step-up in basis on death remains
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OBSERVATION:Many more people not subject to estate tax.Managing step-up may become more important.Splitting strategies for income, particularly QBI, becomes relevant.
OBSERVATION:
Many more people not subject to estate
tax
Managing step-up may become more
important
Splitting strategies for income, particularly QBI, becomes
relevant
Slide43Don’t
Forget that there is now an interface on 199A and Estate planning with incomplete Non-Grantor trusts.Fail to review estate planning.
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Slide44More Stuff
Muni Bonds:House bill would have made interest on new Private Activity Bonds (PABs), new advance refunding bonds and new bonds issued for professional sports stadium taxableFinal bill: all still tax-exemptUnrelated Business Income Tax: House bill would have made broad changes to definition and application of UBITFinal bill: Tax-exempts with more than one source of UBIT (i.e. more than one unrelated business) must calculate income/losses for each separately and can’t combine (net) income/losses to calculate UBIT
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Private foundation
excise tax streamlined to 1.4
%
Private college and universities
excise tax of 1.4% on investment income:
More than 500
students
Assets over $500,000 per
student
State college and universities not subject to
provision
Endowments: Harvard
$34.5B, Princeton $22.15B.
U
of M paltry $
10.9B
Stock Options
restricted stock or RSU in privately traded stock may defer recognition of
income
for up to 5
years
(new
11/06
)
Slide45Disclaimer
This presentation and these materials are provided for informational and educational purposes based upon publically available information from sources believed to be reliable. This presentation and these materials are provided with the understanding that the author/presenter is not engaged in rendering legal, accounting, or other professional services, and it is not intended to provide any basis for legal, accounting, or other professional services.
Due to the constantly changing nature of the subject, this outline should not be used as a resource for any tax or accounting opinion, or tax return position.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
COPYRIGHT ©
2018,
LJPR Financial Advisors
Slide46LJPR Financial Advisors
5480 Corporate Drive, #100Troy, Michigan 48098248.641.7400ljpr.com
©2018,
LJPR Financial Advisors