The Long Lasting Impact of the Tax Reform

1. THE LONG LASTING
IMPACT OF THE
TAX REFORM
L E T ’ S G E T R E A D Y

2. INDIVIDUALS
PASS-THROUGH ENTITIES
INTERNATIONAL
TABLE OF CONTENTS
BUSINESS AND
CORPORATE

3. INDIVIDUALS
Presented by: Anthony Cilibrasi, CPA, MST

4. Pre-Reform 2017 Tax Rate Tables Post Reform 2018 Tax Rate Tables
Rate Single Married Rate Single Married
10% $0-$9,525 $0-$19,050 10% $0-$9,525 $0-$19,050
15% $9,526-$38,700 $19,051-
$77,400
12% $9,526-$38,700 $19,051-
$77,400
25% $38,701-
$93,700
$77,401-
$156,150
22% $38,701-
$82,500
$77,401-
$165,000
28% $93,701-
$194,450
$156,151-
$237,950
24% $82,501-
$157,500
$165,001-
$315,000
33% $195,451-
$424,950
$237,951-
$424,950
32% $157,501-
$200,000
$315,001-
$400,000
35% $424,951-
$4276,700
$424,951-
$480,050
35% $200,001-
$500,000
$400,000-
$600,000
39.6% $426,701-up $480,050-up 37% $500,000 up $600,000-up
4
TAX RATE CHANGES

5. Income Level Federal Tax (decrease)
400,000 (19,000)
500,000 (18,000)
750,000 (3,000)
1,000,000 (6,000)
2,000,000 (17,000)
3,000,000 (4,000)
5
Assumes $10,000 of dividends, $40,000 Real Estate tax. Two Children
IMPACT ON NYS RESIDENT AT VARIOUS
INCOME LEVELS

6. 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 10,000
2,000,000 13,000
3,000,000 40,000
6
Assumes $10,000 of dividends, $40,000 Real
Estate tax. Two Children
IMPACT ON NYC RESIDENT AT VARIOUS
INCOME LEVELS

7. • Personal Exemptions
• State and Local Income and Property Tax-$10,000 exception
• Miscellaneous Itemized Deductions
• Tax Preparation Fees
• Investment Advisory Fees
• Employee Business Expenses
• Moving Expenses
• Personal Casualty Losses (except for Federally declared disaster areas)
7
THINGS THAT ARE GONE

8. • Shared Responsibility Payment (2019)
• Alimony Taxability and Deduction (2019 Agreements)
• Gambling expenses in excess of net winnings
8
THINGS THAT ARE GONE (Cont.)

9. • Interest Expense
• 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)
• Home Equity Line of Credit
• Interest allowed on HELOC only to extent proceeds were used to
acquire, construct or substantially renovate property
EXAMPLE-$100,000 HELOC used in 2016 to buy $50,000 car and $50,000 to repair
and replace roof on home. In 2018 interest on roof repair only deductible
9
THINGS THAT HAVE CHANGED

10. 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
• Timing of Deductions
• Child Credit Increased to $2,000 per child and $500 per non child dependent
• Credit fully available until AGI reaches $400,000. ($200,000 single)
• Up to $1,400 refundable if tax liability is zero
10
THINGS THAT HAVE CHANGED (Cont.)

11. • 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
• Use of losses limited to 80% of taxable income
11
THINGS THAT HAVE CHANGED (Cont.)

12. • 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
12
ALTERNATIVE MINIMUM TAX

13. • For 2018, 28% vs 37%
• AMT exemption increased (for 2018, exemption is $70,300 for single and HOH,
$109,400 for MFJ)
• 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
13
ALTERNATIVE MINIMUM TAX –
2018 VERSION

14. CHANGES TO BUSINESS
TAXES UNDER TAX CUTS
AND JOBS ACT
Presented by: William Conron, CPA

15. CORPORATE TAXES
• Corporate tax rate changed to a 21% flat tax
o Corporations with over $100,000 of taxable income will be paying less tax in
2018
• Corporate AMT eliminated
o AMT credit carryovers refundable starting in 2018 with limits
o 50% of the excess of the AMT credit over what was used against the liability
will be refundable each year
15

16. BUSINESS INTEREST EXPENSE LIMITATION
• Business interest expense limited to 30% of adjusted taxable income
o 2018 – 2022 adjusted taxable income = interest income + EBITDA + floor plan
financing interest
o 2023 – 2025 adjusted taxable income = interest income + EBIT+ floor plan
financing interest
o Excess interest carries forward indefinitely
o Real property trades or businesses who make an election to depreciate real
property using ADS will not be subject to the interest expense limitation
o Limitation does not apply to businesses with average gross receipts of $25M
or less
16

17. DEPRECIATION
• Temporary 100% Expensing for Certain Business Assets, reducing by
20% per year after 2022
o Applies to new and used property
o Full expensing for property placed in service after September 27, 2017 until
January 1, 2023
o January 1 2023 – December 31, 2023 80% expensing
o January 1 2024 – December 31, 2024 60% expensing
o January 1 2025 – December 31, 2025 40% expensing
o January 1 2026 – December 31, 2026 20% expensing
o Can elect out to 50% bonus – managing EBIT for Interest
limitation
• Section 179 expensing increased to $1M, phaseout threshold limit to
$2.5M
17

18. ACCOUNTING METHOD CHANGES
FOR SMALL COMPANIES
• What is a small company?
o 3 year average gross receipts under $25M
• Cash method of accounting
o Average gross receipts of less than $25M (previously $5M) for the past 3
years are permitted to use the cash method of accounting regardless of entity
structure of industry. Change in method of accounting under 481.
• Accounting for inventories
o Average gross receipts of less than $25M for the past 3 years are exempt
from requirement to account for inventories under 471 regardless of entity
structure of industry
• UNICAP
o Taxpayers with average Gross receipts of less than $25M (previously ($10M)
are not required to capitalize direct and indirect costs related to real or
tangible property acquired for resale
18

19. NET OPERATING LOSSES
• Carried forward indefinitely and will be increased as if it earned interest to preserve
its value over time
• Limited to 80% of business’ net income
• Carry back essentially eliminated
19

20. ENTERTAINMENT, MEAL AND
TRANSPORTATION EXPENSES
• Deductions are eliminated for most entertainment expenses after 2017
• Deductions are eliminated for transportation and commuting benefits after
2017
• Deductions are eliminated after 2025 for employer –provided meals that
are excludable from an employee’s income or are de minimus fringes
20

21. OTHER NOTABLE PROVISIONS
• Like-kind exchanges for property other than real estate eliminated
• R&D still around but after December 31, 2021 expenses amortized over 5
years beginning at the mid-point of the tax year in which the expenditures
are paid or incurred
o There is no restriction to expenses paid and accrued prior to 2022
• Loose Domestic Production Deduction
o 9% deduction based on qualified production activity income
21

22. PASS-THROUGH ENTITIES
Presented by: Ronald B. Hegt, CPA

23. • Qualified Trade or Business owners (other than C Corporations) receive a
deduction of 20% of Qualified Business Income subject to several
restrictions.
• Qualified Trade or Business includes all trades or businesses other than
the following service businesses:
23
FLOW THROUGH BUSINESS
TAX DEDUCTION

24. • Performance of Services in the fields of
• Health
• Accounting
• Law
• Consulting
• Performing Arts
• Athletics
• Finance and Brokerage Services
• Any trade or business where principal asset is the reputation or skill of one or more
owners or employees.
• A sculptor runs his business through an S corp. Anyone looking for him to
sculpt something would not hire his corporation if not for him.
24
FLOW THROUGH BUSINESS DEDUCTION -
INELIGIBLE BUSINESSES

25. • Step 1 - Deduction equal to 20% income allocated to owner.
• Step 2 - Above deduction limited to HIGHER of
• 50% of wages paid by business or
• 25% of wages paid plus 2.5% of depreciable basis of assets used in trade or
business.
• Step 3 - If Business owner’s taxable income is under $315,000 the Step 2 limitation
does not apply. This benefit phases out AT $415,000.
• Step 4 - Amount determined above further limited to 20% of business owner’s
taxable income.
25
FLOW THROUGH BUSINESS DEDUCTION -
ELIGIBLE BUSINESS RULES

26. • Gross Income $2,000,000
• Salary Paid $500,000
• Taxable Income to Investors $1,500,000
• Step 1 - 20% of $1,500,000 = $300,000
• Step 2 - 50% of wages Paid = $250,000
• Step 3 - If business owner’s taxable income (1040) is $310,000 deduction is
$300,000 (no step 2 limit). If business owner’s taxable income is $415,000
deduction is $250,000
• Step 4 - Step 3 computation limited to 20% of taxable income. If TI=$310,000
deduction limited to $62,000
26
FLOW THROUGH BUSINESS DEDUCTION -
ELIGIBLE BUSINESS EXAMPLE

27. • Step 1 - In general business owner (i.e., an MD owning an interest in an LLC
engaged in the practice of medicine) not entitled to any flow through deduction.
• Step 2 - If business owner’s taxable income is under $315,000 deduction equal to
20% of otherwise ineligible income. This benefit phases out by $415,000
• Step 3 - Step 2 deduction limited to 20% of business taxable income.
27
FLOW THROUGH BUSINESS DEDUCTION-
INELIGIBLE BUSINESS RULES

28. • Use of Managed Service Organization (MSO) to run non professional portion of
practice. (Billing service, Accounts Receivable and Payable Management, H.R.
functions, office maintenance and management)
• Complete lack of Treasury Guidance
• Business Purpose Test
• Is an Ambulatory Surgery Center a:
• Ineligible Service in field of Health? Or
• Specialty landlord leasing operating room facilities for patient use?
• Sales of Insurance and/or Real Estate
• Commission Sales Agents; or
• Brokers (a disqualified service)
28
FLOW THROUGH BUSINESS INCOME -
DISCUSSION POINTS

29. INTERNATIONAL
Presented by: Jennifer Sklar-Romano, JD, LL.M, MBA

30. MODIFIED TERRITORIAL TAX REGIME
• Adoption of dividend participation exemption system
• U.S. corporate shareholders of specified foreign corporations (SFC)
allowed a full deduction against the foreign-source portion of dividends
received
• U.S. shareholder must hold the stock of the SFC for more than 1 year
• Foreign tax credits disallowed for any dividend to which the DRD applies
• Subpart F and Section 956 investment in U.S. property rules continue to
apply to certain CFC shareholders
• Exception for hybrid dividends
30

31. • One-time toll tax on undistributed nonpreviously taxed foreign earnings
and profits (E&P)
• Pre-2018 accumulated deferred E&P MUST be included as Subpart F
income
• Income inclusion for 2017 tax year
• Toll tax applies to ALL U.S. shareholders of a SFC that is also a deferred
foreign income corporation (DFIC)
• E&P measurement date greater of E&P on Nov. 2, 2017 or Dec. 31, 2017
• Allocation of E&P deficits permitted
• Payment is due over 8 years
31
MANDATORY REPATRIATION TAX

32. • Tax Rates
o Corporations - 15.5% on cash/cash equivalents and 8% on noncash assets
o Individuals- 17.54% on cash/cash equivalents and 9.05% on noncash assets
• Fiscal year CFCs could possibly get a one-year break (Prop. Reg.
§1.898-1(c)(1))
• Taxpayers can elect to preserve NOLs
• Disallowance for specific portion of foreign tax credit (FTC)
• State tax ramifications?
32
MANDATORY REPATRIATION TAX

33. • Expansion of U.S. Shareholder definition to include value as well as vote
• Downward attribution from foreign persons to related U.S. persons
• Repeal of 30-day minimum holding period
33
MODIFICATIONS TO SUBPART F REGIME

34. • Rev. Rul. 91-32 position codified in response to taxpayer-friendly Tax
Court decision in Grecian Mining case (currently under Appeal by the
IRS)
• Nonresidents selling an interest in a U.S. partnership will be taxable on
the gain as deemed attributable to ECI
• Hypothetical sale treatment mandated as if the U.S. partnership sold all of
its assets
o 10% WHT imposed on gross proceeds
• FIRPTA rules continue to apply to gain from the sale of real estate held by
a U.S. partnership
• Effective for sales after Nov. 26, 2017, however, WHT requirement only
applies to dispositions after Dec.31, 2017
34
SALE OF U.S. PARTNERSHIP INTEREST BY
U.S. NON-RESIDENTS

35. • Imposes a tax on foreign-source intangible income
• Aimed at counteracting the incentive created by the participation exemption to shift
profits offshore
• Applies to U.S. shareholders of CFCs
• Treated as Subpart F income
35
GLOBAL INTANGIBLE LOW-TAXED INCOME
(GILTI)

36. • Aimed at preventing companies from stripping out U.S. earnings via
deductible payments (e.g., interest, royalties) to foreign affiliates
• Targets companies that significantly reduce their U.S. tax liability with base eroding
payments to foreign affiliates
• Applies to C corporations and 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%
• Both domestic corporations and foreign corporations generating effectively connected
income (ECI)
36
BASE EROSION ANTI-ABUSE TAX (BEAT)

37. CITRINCOOPERMAN.COM
WILLIAM T. CONRON, CPA
PARTNER | CONNECTICUT
(203) 847-4068
wconron@citrincooperman.com
ANTHONY CILIBRASI, CPA, MST
DIRECTOR | WESTCHESTER
(914) 949-2990
acilibrasi@citrincooperman.com
RONALD B. HEGT, CPA
PARTNER | WESTCHESTER
(914) 949-2990
rhegt@citrincooperman.com
JENNIFER SKLAR-ROMANO, JD, LL.M, MBA
DIRECTOR | NEW YORK CITY
(212) 697-1000
jsklar-romano@citrincooperman.com
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