Check out CPA's view on how H.R.1 (new tax reform) will impact you and your passthrough entity; emphasis is on service businesses.

1. Tax Reform and the
Passthrough Entity;
emphasis on service business.
How H.R.1 will impact you and
your passthrough entity; emphasis
on service businesses.
Margaret Schopp, CPA
Schopp & Co., An Accountancy Corp
MSchopp@Schoppcpa.com
© Schopp & Co., An Accountancy Corp

2. Agenda
• Individual
• Standard deduction
• Federal income tax
• Itemized deductions
• C Corporations
• Passthrough Entities - additional discussion on S Corporations
• Specified Service Trade or Business
• 20% deduction
• Examples
• Miscellaneous
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3. Background
• Source documents:
• KPMG – New Tax Law: H.R.1 – Initial Observations
• Deloitte webcast - Special Edition | US tax reform: Understanding the Tax Cuts and Jobs Act
• Deloitte is my “home” firm and they do a great job with the Dbrief series.
• https://www2.deloitte.com/us/en/pages/dbriefs-webcasts/topics/upcoming-webcasts.html
(registration required)
• Patience is required:
• Possible need for subsequent clarifications
• IRS timing and focus on revised tax forms
• Payroll service providers updating withholding tables
• Timing so close to year-end
• Our understanding and strategic planning will change over time.
• A lot of simplification went into this presentation in order to focus on the concepts. Your
situation may not yield the results outlined here. This presentation should not replace
individual tax planning and should not be used to maximize tax efficiencies.
• Implications of state income tax are not considered in this discussion
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4. Standard Deduction and Exemptions:
NO dependents
Filing Status
Standard
Deduction
Total
Single 12,000 12,000
Head of Household
(HOH)*
N/A
Married/Joint 24,000 24,000
Married/Separate 12,000 12,000
Filing Status
Standard
Deduction
Exemptions Total
Single 6,350 4,050 10,400
Head of Household
(HOH)*
N/A
Married/Joint 12,700 8,100 20,800
Married/Separate 6,350 4,050 10,400
2017 2018
2017 exemptions are $4,050 per individual. *Cannot qualify for HOH unless you have at least one dependent
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5. Standard Deduction and Exemptions:
One dependent
Filing Status
Standard
Deduction
Total
Single N/A
Head of Household 18,000 18,000
Married/Joint 24,000 24,000
Married/Separate 12,000 12,000
Filing Status
Standard
Deduction
Exemptions Total
Single N/A
Head of Household 9,350 8,100 17,450
Married/Joint 12,700 12,150 24,850
Married/Separate 6,350 8,100 14,450
2017 2018
2017 exemptions are $4,050 per individual.
© Schopp & Co., An Accountancy Corp
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6. Standard Deduction and Exemptions:
Two dependents
Filing Status
Standard
Deduction
Total
Single N/A
Head of Household 18,000 18,000
Married/Joint 24,000 24,000
Married/Separate 12,000 12,000
Filing Status
Standard
Deduction
Exemptions Total
Single N/A
Head of Household 9,350 12,150 21,500
Married/Joint 12,700 16,200 28,900
Married/Separate 6,350 12,150 18,500
2017 2018
2017 exemptions are $4,050 per individual.
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7. SINGLE – Federal Tax at Various Income Levels
20,981
34,981
49,398
65,898
115,398
18,289
30,289
45,689
63,188
115,688
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
$100,000 $150,000 $200,000 $250,000 $400,000
FederalIncomeTax
Taxable Income
2017 2018
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8. MFJ – Federal Tax at Various Income Levels
16,477
42,884
74,216
107,216
143,229
341,229
13,879
36,578
60,578
91,378
126,378
309,377
-
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
$100,000 $200,000 $300,000 $400,000 $500,000 $1,000,000
FederalIncomeTax
Taxable Income
2017 2018
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9. HOH – Federal Tax at Various Income Levels
19,252
32,316
46,316
62,190
78,690
95,190
16,897
28,897
44,297
61,797
79,297
96,797
-
20,000
40,000
60,000
80,000
100,000
120,000
$100,000 $150,000 $200,000 $250,000 $300,000 $350,000
FederalIncomeTax
Taxable Income
2017 2018
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10. Individuals
• Tax rates are effective January 1, 2018
• Tax rates to expire in 2025
• Exception is the individual mandate of the Affordable
Care Act (ObamaCare)
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11. Individuals: Changes to Itemized Deductions
• Medical:
• 7.5% of AGI threshold for 2017 and 2018;
• 10% after 2018
• State and Property Tax:
• Capped at $10,000
• Mortgage Interest:
• Debt incurred before December 15, 2017 is subject to $1 million limitation
• Debt after December 15, 2017 is subject to $750,000 limitation
• Home equity interest is eliminated
• Charitable Deductions:
• Currently 50% of AGI
• 2018 -2025: 60% of AGI
• Misc Deductions subject to 2%:
• all suspended (includes unreimbursed business, investment fees)
• Child tax credits: $2,000 per child, $1,400 is refundable
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12. Alternative Minimum Tax (AMT)
Filing Status
Exemption
Amount
Phase-out
Threshold
Single 70,300 500,000
Head of Household 70,300 500,000
Married/Joint 109,400 1,000,000
Married/Separate 54,700 500,000
Filing Status
Exemption
Amount
Phase-out
Threshold
Single 55,400 123,100
Head of Household 55,400 123,100
Married/Joint 86,200 164,100
Married/Separate 43,100 82,050
Current Law 2018
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13. Corporate (C Corporations)
• Permanent tax rate reduction from 35% to
21% (no tax brackets – 21% flat rate)
• Rate takes effect January 1, 2018
• No corporate AMT (alternative minimum
tax)
• 100% deduction of plant and equipment –
both new AND used equipment
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14. Passthrough Entities
Who is a “passthrough”
• Sole Proprietor (Schedule C)
• Partnership (Form 1065)
• S Corporations (Form 1120-S)
Basically those in which the income from the business
passes through to the owners of the business. Tax is not
paid at the business level, but at the owner level.
© Schopp & Co., An Accountancy Corp
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15. How is the Passthrough going to be taxed?
• Change takes place in the owners tax return (Form
1040)
• New rules are going to sunset in 2025
• Deduction of 20% of the individual’s domestic
qualified business income:
• subject to:
• Wages: wages need to be more then twice the deduction
• Taxable Income (see separate slide)
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16. “Specified Service Trade or Business”
including:
Performance of service in the field of:
• Health
• Law
• Accounting
• Actuarial science
• Performing arts,
• Consulting
• Athletics,
• Financial Services
• Brokerage Services
• Or, any other trade or business where the principal assets is
the reputation or skill of the owner/employee
• Engineers and architects are carved out
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17. Deduction of 20% for “Specified Service” is
Limited
• Threshold:
• Single (assuming also HOH) - $157,500
• MFJ - $315,000
• Phase-out, an additional:
• Single (assuming also HOH) - $50,000
• MFJ - $100,000
• Threshold is on TAXABLE INCOME, not just business
income. Unclear how this will appear on the tax return.
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18. Deduction of 20% for “Specified Service” is
Limited: cont.
Filing Status Taxable Income Deduction
Single $157,500 and under 20%
$207,500 and over 0%
MFJ $315,000 and under 20%
$415,000 and over 0%
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19. Deduction of 20% for “Specified Service”
• 50% of wage limitation
• No change to “reasonable compensation”
(reasonable comp is NOT 50% of net income)
• Not sure how this is going to apply to sole-
proprietorships and partnerships – no wages.
© Schopp & Co., An Accountancy Corp
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20. The Tax Return:
Single (under threshold): net change $(9,381)
2017 Method
Wages 60,000
K-1 (S Corp) 100,000
LESS: S Corp Health 12,000
AGI 148,000
LESS:
Standard Deduction 10,400
20% Deduction
Taxable Income 137,600
Tax 31,509
2018 Method
Wages 60,000
K-1 (S Corp) 100,000
LESS: S Corp Health 12,000
AGI 148,000
LESS:
Standard Deduction 12,000
20% Deduction ** 20,000
Taxable Income 116,000
Tax 22,128
** Subject to limitation – 50% of wages
© Schopp & Co., An Accountancy Corp
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21. The Tax Return:
MFJ (under threshold): net change $(7,506)
2017 Method
Wages 60,000
K-1 (S Corp) 100,000
LESS: S Corp Health 12,000
AGI 148,000
LESS:
Standard Deduction 24,850
20% Deduction
Taxable Income 123,150
Tax 22,264
2018 Method
Wages 60,000
K-1 (S Corp) 100,000
LESS: S Corp Health 12,000
AGI 148,000
LESS:
Standard Deduction 24,000
20% Deduction ** 20,000
Taxable Income 104,000
Tax 14,758
© Schopp & Co., An Accountancy Corp
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22. The Tax Return:
HOH (under threshold): net change $(7,572)
2017 Method
Wages 60,000
K-1 (S Corp) 100,000
LESS: S Corp Health 12,000
AGI 148,000
LESS:
Standard Deduction 17,450
20% Deduction
Taxable Income 130,550
Tax 26,889
2018 Method
Wages 60,000
K-1 (S Corp) 100,000
LESS: S Corp Health 12,000
AGI 148,000
LESS:
Standard Deduction 18,000
20% Deduction ** 20,000
Taxable Income 110,000
Tax 19,297
© Schopp & Co., An Accountancy Corp
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23. The Tax Return:
Single (OVER threshold): net change $(2,918)
2017 Method
Wages 90,000
K-1 (S Corp) 200,000
LESS: S Corp Health 12,000
AGI 278,000
LESS:
Standard Deduction 10,400
20% Deduction
Taxable Income 267,600
Tax 71,706
2018 Method
Wages 90,000
K-1 (S Corp) 200,000
LESS: S Corp Health 12,000
AGI 278,000
LESS:
Standard Deduction 12,000
20% Deduction Over
threshold
= 0
Taxable Income 266,000
Tax 68,788
© Schopp & Co., An Accountancy Corp
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24. The Tax Return:
MFJ (OVER threshold): net change $(15,207)
2017 Method
Wages 190,000
K-1 (S Corp) 300,000
LESS: S Corp Health 12,000
AGI 478,000
LESS:
Standard Deduction 24,850
20% Deduction
Taxable Income 453,150
Tax 125,484
2018 Method
Wages 190,000
K-1 (S Corp) 300,000
LESS: S Corp Health 12,000
AGI 478,000
LESS:
Standard Deduction 24,000
20% Deduction Over
threshold
= 0
Taxable Income 454,000
Tax 110,277
© Schopp & Co., An Accountancy Corp
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25. The Tax Return:
HOH (OVER threshold): net change $376
2017 Method
Wages 90,000
K-1 (S Corp) 200,000
LESS: S Corp Health 12,000
AGI 278,000
LESS:
Standard Deduction 17,450
20% Deduction
Taxable Income 260,550
Tax 65,672
2018 Method
Wages 90,000
K-1 (S Corp) 200,000
LESS: S Corp Health 12,000
AGI 278,000
LESS:
Standard Deduction 18,000
20% Deduction Over
threshold
= 0
Taxable Income 260,000
Tax 65,296
© Schopp & Co., An Accountancy Corp
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26. Other Stuff to Know
• Repealed:
• Entertainment
• Membership dues for clubs organized for business, pleasure,
recreation, or other social purposes.
• Deduction for commuter benefits
• Expanded:
• Meals provided by employer, now only 50% v 100%
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27. Depreciation
• Section 179 – increased to $1 million
• To qualify for Section 179:
• Tangible property (including off-the-shelf software)
• > 50% for business
• Acquired by purchase
• Examples:
• Machinery and equipment (including computer equipment)
• Office equipment
• Business vehicles with a gross weight IN EXCESS of 6,000 lbs
• Section 179 deduction cannot exceed taxable income, but can be carried
forward.
• Section 179 for SUV’s is limited to $25,000
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28. Depreciation
• “Special Depreciation” – increased from 50% to 100%
• Now includes new AND used equipment
• Examples include:
• Office furniture
• Copier
• Computers
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29. Net Operating Losses (NOL)
• Limited to 80% of taxable income
• No carryback (except farming and insurance)
• Indefinite carryforward (v 20 year)
2017 2018 2019
Taxable Income (100,000) 100,000 100,000
NOL
Carryforward
Applied
(80,000) (20,000)
Taxable Inc After
NOL
20,000 80,000
© Schopp & Co., An Accountancy Corp
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30. We appreciate your attention.
If you have any questions or comments, please
contact us at:
Margaret Schopp
mschopp@schoppcpa.com
Thank you.
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