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Get Smart on Bookkeeping and Taxes for Startups

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Bookkeeping and taxes might be the farthest thing from your mind when starting a business, but if they are done wrong, or not done at all, it can end up costing you more than you realize.

Eileen Driscoll of Supporting Strategies will discuss the “Three C’s” of proper bookkeeping - consistency, controls and cash - for your business to ensure you can produce accurate and useful financial information. She will be joined by Robert Traester and Dawn Darnell of WithumSmith+Brown, PC who will discuss tax planning opportunities for your business in a post-tax-reform climate.

Eileen Driscoll, Managing Director, Supporting Strategies
Robert Traester, Senior Tax Accountant, WithumSmith+Brown, PC
Dawn Darnell, Senior Manager, WithumSmith+Brown, PC

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Get Smart on Bookkeeping and Taxes for Startups

  1. 1. Tonight’s Schedule Get Smart on Bookkeeping and Taxes for Startups www.mitforucambridge.org Speakers • Eileen Driscoll, Managing Director, Supporting Strategies • Robert Traester, Senior Tax Accountant, WithumSmith+Bro wn, PC • Dawn Darnell, Senior Manager, WithumSmith+Brown, PC Event Schedule 5:30 - 6:00pm - Registration & networking (light refreshments served) 6:00 - 8:00pm - Program with Q&A
  2. 2. Upcoming Events • Startup Spotlight 2018 – Apply to Exhibit – January 22 at 8:00 AM - April 20 at 5:00 PM • Mentor Smart Program – Open Application Period – March 1 - March 31 • Launch Smart Clinic – Internet of Things (IoT) – March 6 at 5:30 PM - 8:30 PM • Blockchain & Bitcoin Workshop – March 6 at 6:00 PM - 8:00 PM
  3. 3. Announcements • Join 1600 Entrepreneurs on The Greater Boston Startups Group
  4. 4. SUPPORTING STRATEGIES Bookkeeping for Emerging Companies
  5. 5. Eileen Gallagher Driscoll, CPA ▹ Managing Director, Supporting Strategies | Boston ▹ Experienced in building a best in class back office ▹ Loves working with growing companies! Eileen’s Goals in Working with Companies ▹ Owners focus on Building a Business ▹ Provide financial information to owners to make good business decisions ▹ Develop systems that will grow with your business ABOUT THE SPEAKER
  7. 7. FOUNDER ISSUES ? ▹ Invoicing Customers ▹ Paying Vendors ▹ Raising Capital Jon Smith
  8. 8. FOUNDER’S COMPENTENCIES Dealmaker Developer Innovator
  9. 9. THERE ARE 3 C’S IN SUCCESS Consistency Controls Cash
  10. 10. THE FIRST C: CONSISTENCY Consistency Company Accounting What How Who When
  11. 11. CONSISTENCY: WHAT What needs to be done? ▹Invoice Customers ▹Expenses & Bill Payment ▹Payroll & HR Issues ▹Cash Management ▹Budget Tracking ▹Financial Reporting ▹Other Business Matters
  12. 12. CONSISTENCY: WHAT Now that you know the what … define the how Software Business Process
  13. 13. CONSISTENCY: HOW ▹ Bookkeeping Software ▹ Payroll Services ▹ Web-based Productivity Tools (Bill Payment, Expense Tracking) ▹ Spreadsheets
  14. 14. CONSISTENCY: WHO Typical Bookkeeping Accounting Team CFO Controller Staff Accountant HR/Payroll Bookkeeper CPA Firm
  15. 15. CONSISTENCY: WHO The New Accounting Team Model Part Time CFO Part Time Controller/Bookk eeper CPA Firm
  16. 16. CONSISTENCY: WHEN ▹ Post Transactions - as they occur (Invoices, vendor payments, cash receipts…) ▹ Record Payroll – at the time of payment ▹ Reconcile Balance sheet accounts - month end ▹ Financial Statement preparation - month end ▹ Analyze results - Compare to budget & KPIs Make sound business decisions on timely, accurate information!
  17. 17. CONSISTENCY: WHY ▹ Make decisions based on reliable financial information ▹ Compliance - taxes, investor requirements, etc. ▹ Planning for the future - an investor or exit perhaps?
  18. 18. THE SECOND C: CONTROLS Integrity & Accuracy in Financial Information Cash Controls Segregation of Duties Month-end Close & Review Data Security Documentation External Review or Audit
  19. 19. THE THIRD C: CASH Cash Reporting Cash Forecasting Managing Cash
  20. 20. MANAGING CASH ▹ Determine your breakeven point ▹ Focus on cash flow management ▹ Maintain some cash reserves ▹ Collect receivables ASAP ▹ Encourage customers to pay up faster ▹ Extend payables if possible ▹ Use technology to your advantage
  21. 21. CASH REPORTING Regular Reconciliation Cash Flash Understand Statement of Cash Flows
  22. 22. FORECASTING CASH Beginning Cash Receipts Revenue or Capital Expenditures Ending Cash
  23. 23. MANAGING THE 3 C’S FOR SUCCESS Controls Consistency Cash
  24. 24. SUPPORTING STRATEGIES ROLE Concentrate on building your business Make better business decisions with real-time financial data Count on financial systems that efficiently scale as your business grows Benefit from a premier team of experienced professionals Institute procedures and controls that minimize risk By working with Supporting Strategies, you’ll be able to:
  25. 25. QUESTIONS & COMMENTS? Edriscoll@supportingstrategies.com supportingstrategies.com
  26. 26. 26 MIT Enterprise Forum Tax Implications for Startups Dawn Darnell, CPA Robert Traester, CPA, MST
  27. 27. 27 Withum 43Years in Experience $175MIn Revenue Per Year 17,000Clients Worldwide Top 30 (26th) Accounting Firm in the United States 6th Largest Regional Accounting Firm in NE 1st Accounting Firm Pacesetter
  28. 28. 28 WithumWithum Offices 14 Office Locations  New York, NY  Whippany, NJ  East Brunswick, NJ  Paramus, NJ  Princeton, NJ  Red Bank, NJ  Boston, MA  Bethesda, MD  Philadelphia, PA  Blue Bell, PA  Orlando, FL  West Palm Beach, FL  Aspen, CO  Cayman Island
  29. 29. 29 Agenda Types of Business Entities Tax Saving Opportunities Equity Compensation Multistate Issues Tax Reform Updates
  30. 30. 30 Choice of Entity How should I form my business? Is there a separate tax filing? Can I just keep the business under my name?
  31. 31. 31 Types of Business Entities Sole proprietorships Partnerships Limited Liability Companies (LLCs) C-Corporations S-Corporations
  32. 32. 32 Sole Proprietorship  An unincorporated business owned by one individual  Sole proprietor reports all profits and losses on his/her individual tax return (your 1040)  Individual owns all business assets and liabilities  Business normally dissolves with death of owner  Necessary to keep track of income and expenses  Separate checking account – VERY important  FID # is NOT necessary
  33. 33. 33Things to Consider Advantages Simplest form of business to start and maintain No requirements for formation; no franchise fees or licenses, no annual fees No formal operations or meetings for minutes Complete management authority Business losses can offset any non- business income on the individual’s personal tax return Self employed SEP, Simple & Qualified plans, and Self employed health insurance are deductible as adjustments for AGI on the Sole Proprietorship Disadvantages Owner is personally liable for all debts and obligations of the business; unlimited liability All business assets, as well as personal assets are exposed to the risk of loss Hobby loss rules Owner is subject to self employment tax 15.3% of your net income – (double the FICA)
  34. 34. 34 Partnerships  A relationship between two or more persons or entities who agree to carry on a trade or business together for profit  Flow through entities – K-1  Self employed SEP, Simple & Qualified plans, and Self employed health insurance are deductible as adjustments for AGI on the partners’ 1040  Partnership agreements – not required, but recommended
  35. 35. 35 Partnerships  Simple business formation  Partnership losses can offset any other taxable income on the partner’s tax return Advantages  Partners are subject to the self employment tax  Automatic Dissolution (generally)  General partners are joint and severally liable  Limited partners do not have management rights Disadvantages
  36. 36. 36 Limited Liability Companies (LLC)  Startup ease of a sole proprietorship/partnership  Legal protections of a corporation to the members (owners)  Tax structure flexibility  A single member LLCs are classified as a proprietorship by default  Multimember LLCs are classified as a partnership by default  Other classifications can be elected by filing Form 8832 (C-Corp)  Most states do not restrict ownership  Allowed under state statutes (differs across states)  Typically annual filing fees (MA - $500)
  37. 37. 37 C-Corporations Characteristics Legal entity separate and apart from its owners Files Articles of Incorporation and has annual filings Board of Directors must be elected Annual meetings must be held with minutes Stocks must be issued Shareholders, directors, or officers of the corporation are normally not legally
  38. 38. 38 C-Corporations No restrictions on type of shareholder Attractive to foreign investors Multiple classes of stock Tax filing at entity level only Advantages Two layers of taxation No capital gain tax difference on sale of assets Disadvantages
  39. 39. 39 S-Corporation  Shareholders enjoy the same limited liability as shareholders of a C Corporation  Flow through taxation to shareholders  Maximum of 100 owners  No partnerships, corps, or non-resident alien shareholders  Only one class of stock allowed  C-Corps File Form 2553 with the Internal Revenue Service for S- Corp status
  40. 40. 40 S-Corporation One layer of taxation No self-employed tax on profit Legal protection Advantages Limitations as to number and types of shareholders Distributions must be in accordance with stock ownership Not recognized in all states Reasonable compensation Disadvantages
  41. 41. 41 You’ve Chosen Your Entity…Now What? File a Form SS-4 to request a Federal ID (can be done online) S-Corp Election (if choosing S-Corp status) File with the Secretary of the Commonwealth Create MassTaxConnect account  Use for sales tax, meals tax, withholding tax, etc.  Make tax payments  View Department of Revenue communication
  42. 42. 42 MassTaxConnect
  43. 43. 43 Other Issues to Think About You may owe estimated tax payments Other filing requirements (1099s, 3921s, etc.) Due Dates Vary  Calendar year Partnerships and S-corps are due 3/15  Calendar year C-Corps and Sole Proprietorships (with individual return) are due 4/15  Calendar year LLCs – it depends
  44. 44. 44 Tax Saving Opportunities Stock acquired on original issuance from a US C-Corp after 8/10/1993  Assets below $50 million at time of and right after the issuance of the stock and  At least 80% of the assets were used in the active conduct of a trade or business Investors who hold the stock for 5 or more years get a full or partial exclusion when they sell the stock  Stock acquired after 2011 is eligible for 100% tax free sale of stock up to the greater of $10M of gain or 10X shareholder’s basis  Must be original recipient of stock directly from company Founder’s stock can qualify but must form a C Corporation Qualified Small Business Stock (QSBS)
  45. 45. 45 Tax Saving Opportunities  What expenses qualify?  Lab research  Improvements to products or processes – faster, cheaper, greener  New products, software, or technology  How is it calculated?  6% of Qualified Research Expenses – R&D payroll & supplies; 65% of contractors  Qualified Small Businesses= sale of 5M or less and no sales 5yrs prior to claim year  Credit against payroll taxes (social security)  Credit is calculated and shown on annual tax return  Benefit capped at $250,000/per year for up to 5 years Research and Development (R&D) Credits
  46. 46. 46 Equity Compensation Stock grants or Restricted Stock Units  Stock award subject to vesting over time; sometimes requiring a payment  Taxed upon vesting as compensation at FMV on vesting date (less any payment made)  83(b) elections – allows election to be taxed at the FMV on the date of grant rather than the FMV on the date vested  Must be filed within 30 days from date of grant  Risk of 83(b) – value goes down, company does not succeed  New 83(i) election for some “qualified stock” to defer taxes for up to 5 years from vesting • Must elect within 30 days of grant • Must be “eligible corporation” – requires corp to grant at least 80% of all full-time emp’ees stock options or RSU’s with same rights and privileges Stock options  Options to buy stock at a defined exercise price (usu. FMV date of grant) over a fixed period of time  Typically vest over time (3-5 years), can also be performance based  Either - NQSO’s and ISO’s
  47. 47. 47 Equity Compensation NQSO - Non-Qualified Stock Option  Taxed upon exercise as compensation at FMV less the exercise price paid  When sold, capital gain/loss is difference between FMV on date of sale and FMV on date of exercise ISO – Incentive Stock Option  NOT TAXED UPON AWARD NOR EXERCISE  However, there is an AMT calculation that may result in tax  And, if stock is not held 2 years from the grant date and 1 year from the exercise date, will be taxed like a NQSO (disqualified disposition)  If meet holding requirement, Capital gain/loss is difference between FMV date sold and FMV date grant
  48. 48. 48 Equity Compensation ISO – To Qualify  Only issued by corporations  Only issued to employees (certain Board Members)  Must be issued under a written plan and grant agreement  Must exercise within 10 years and forfeit upon termination if not exercised in 90 days  Limited to 100,000 vesting per year  Restricted transfer rights  Exercise price CAN NOT BE LESS THAN FMV on date of grant
  49. 49. 49 Equity Compensation 409a Valuations –what are they and why do I need them? • Formal valuation of company’s stock; • Typically prepared by a valuation specialist Why • to avoid taxation of stock options under section 409a • exercise price can not exceed the fmv on the date of the grant What if? • EMPLOYEE pays tax on options; plus 20% penalty and interest
  50. 50. 50 Multistate Tax Issues Are you operating in multiple states now? Have you considered your filing needs in other state? Do you think this only applies to large companies?
  51. 51. 51 Nexus The level of contact that must exist between a taxpayer and a state before the state has the authority under the U.S. Constitution to assess a tax Federal Limitations Due Process Clause – Minimum Connection Commerce Clause – Substantial Nexus Public Law 86-272 – Tangible Personal Property
  52. 52. 52 Types of Nexus Physical Presence Having property in the state Having employees in the state Click-Through Nexus (“Amazon Law”) Presumed to exist if out-of-state retailers refer customers to the in- state retailer via links on websites in exchange for compensation Economic Nexus Presumed to exist when company does business in a state and derives revenues from those activities but has no physical presence in the state (i.e., earning franchise fees)
  53. 53. 53 Types of Nexus Pass-through Nexus Applicable by virtue of ownership by the out-of-state company in a flow-through entity that conducts business in or has nexus in the state Factor Presence Nexus Nexus is created based upon the apportionment factors of the entity Apportionment factors (payroll, property or sales) exceeds the state’s statutory threshold May not apply if they fall under the parameters of Public-Law 86- 272
  54. 54. 54 Implications of Nexus FranchiseTax GrossReceiptsTax IncomeTax Withholding IncomeTax Salesand UseTax Physica l Presen ce Public Law 86-272 Econo mic Nexus Factor Presen ce Nexus Physica l Presen ce Physica l Presen ce Factor Presen ce Nexus Physica l Presen ce Physica l Presen ce Click Throug h Econo mic Nexus?
  55. 55. 55 You Have Nexus – Now What? Just one state – just one tax return More than one state – apportion/allocate income among the states Payroll – total payroll in each state vs. total payroll everywhere Property – total property in each state vs. total property everywhere Sales – total sales in each state vs. total sales everywhere
  56. 56. 56 Other State Taxes Sales and Use  Generally required to be imposed on the sale of tangible personal property  Some jurisdictions tax software as tangible personal property  Services are generally exempt BUT some states do have sales tax on services Withholding Taxes Meals Tax, Occupancy, Beverage, Property, Tourism, etc.
  57. 57. 57 MIT Enterprise Forum Impact of Tax Cuts and Jobs Act
  58. 58. 582018 Tax Law Changes Effective Dates Signed into law on December 22, 2017. Most changes are effective on January 1, 2018. Most individual tax changes expire December 31, 2025. Expect additional complications at the state and local level because many states automatically adopt federal changes and others may adopt them in part or in whole at some future date.
  59. 59. 592018 Tax Law Changes S-Corps, Partnerships, “Schedule Cs and Es”: 20% Qualified Business Deduction Effective top rate on pass-throughs becomes 29.6% Limitations/Exceptions:  The wage limit doesn’t apply if the taxpayer earns less than $157,500 (if single, $315,000 if married). If over this income threshold  Limited to certain industries (no “professional services”)  complex calculations must be performed on an individual business level
  60. 60. 602018 Tax Law Changes Pass-through Change: 20% Qualified Business Deduction Special rule for taxpayers claiming section 199A deduction: In the case of any taxpayer who claims the Section 199A deduction, there is a substantial understatement of income tax if the amount of the understatement exceeds the greater of:  5 percent of the tax required to be shown on the return, or (typically 10%)  $5,000. Section 6662: Imposes a 20% penalty on any “substantial underpayment” of tax
  61. 61. 612018 Tax Law Changes Corporate Changes The corporate income tax rate is reduced to a flat rate of 21%. AMT & DPAD are repealed. The Act limits the NOL deduction to 80% for losses arising in tax years beginning after Dec. 31, 2017. The Act eliminates carrybacks (except for farming NOLs, which would be permitted a two-year carryback) and allows unused NOLs to be carried forward indefinitely.
  62. 62. 622018 Tax Law Changes Depreciation – Section 179 Expensing & Bonus Depreciation Increases the amount that a taxpayer may expense under §179 to $1,000,000. The Act also increases the phase-out threshold to $2,500,000. The Act also expands the definition of qualified real property to include all qualified improvement property and certain improvements made to nonresidential real property  (roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems) Taxpayers are able to fully expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional year for certain qualified property with a longer production period)  Phases down from 100% over the next 5 years  No longer has to be new property, just new to the taxpayer
  63. 63. 632018 Tax Law Changes Business Interest Limitation Doesn’t apply to businesses with average receipts of less than $25M. For years after 2017, Net interest expense is only deductible to the extent of 30% of “adjusted taxable income.” Doesn’t include investment interest expense. For flow-through entities, the limitation is first applied at the entity level. Excess interest expense is carried forward indefinitely. Doesn’t apply to electing “real property trades or businesses” or car dealerships with floor-plan interest.
  64. 64. 642018 Tax Law Changes Entertainment expenses disallowed, Meals limited For year after 2017, generally, no deduction is allowed for:  an activity considered to be entertainment, amusement, or recreation,  membership dues for any club organized for business, pleasure, recreation, or other social purposes  or a facility used in connection with any of the above items. The deduction for business meals equal to 50% of the food and beverage expenses associated with operating a trade or business is retained. Meals provided for the convenience of the employer (on the premises) that are nontaxable to the employee as a de minimis fringe benefit are now only 50% deductible. Exceptions under §274(e) are unchanged (i.e. 100% deductible Holiday Party, etc.)
  65. 65. 652018 Tax Law Changes Tax Accounting-Cash Method; Inventory Capitalization, etc Gross receipts limit for cash-method use raised to $25 million, related rules changed. Alternatives to inventory accounting are made available to most small businesses meeting a $25 million gross receipts test. Small business exception to UNICAP rules is expanded to apply to producers and resellers meeting the $25 million gross receipts test.
  66. 66. 662018 Tax Law Changes New Paid Family and Medical Leave Tax Credit – §45S An eligible employer is allowed the credit equal to the applicable percentage of the wages paid to qualifying employees during any period in which those employees are on family and medical leave  Credit is between 12.5% and 25%  Qualifying employees: any employee who: • has been employed by that employer for 1 year or more • and was paid less than $72,000 in 2018.  Paid leave cannot be vacation leave, personal leave, or medical or sick leave, as defined in FMLA section 102(d)(2). A taxpayer can't take both a credit and a deduction for amounts for which the paid family and medical leave credit is claimed.
  67. 67. 672018 Tax Law Changes International Changes Foreign Source Dividends  100% of the foreign-source portion of dividends paid by a foreign corporation to a U.S. corporate shareholder that owns 10% or more of the foreign corporation would be exempt from U.S. taxation.  The American international tax system would be switched from a worldwide income model to a territorial model where foreign profits are generally exempt from U.S. taxation  No foreign tax credit or deduction would be allowed for foreign taxes paid or accrued with respect to any exempt dividend Foreign Derived Intangible Income (FDII)  Impacts domestic C Corps  Deemed Intangible Income of taxpayers that is deemed foreign sourced  Calculates an amount of income that can be attributed to intangible assets  Taxed at rate of 13.125%.  To encourage US Corps to not hold intangible property abroad
  68. 68. 682018 Tax Law Changes International Changes Global Intangible Low Tax Income (GILTI)  GILTI is the income of a Controlled Foreign Corporation (CFC), reduced for certain adjustments • US Shareholder is 10% or greater owner • US Shareholders own more than 50% of vote or value of corp (direct & indirect tests)  Tax on intangible income that has been taxed at lower foreign rates  Deemed repatriated in the year earned.  An individual shareholder or an investor in a flow-through entity • Taxed at the highest ordinary income tax rate applicable to such individual.  A corporation with GILTI • Pays an effective tax of 10.5% on its GILTI. An indirect foreign tax credit is allowed to reduce the GILT Income  GILTI has its own separate foreign tax credit limitation basket with no carryforwards
  69. 69. 692018 Tax Law Changes Mandatory Repatriation The Act imposes a mandatory tax on post-86 accumulated foreign earnings Tax rate depends on how the accumulated deferred earnings are held:  cash or cash equivalents taxed at 15.5%  Illiquid assets taxed at 8%. Taxpayers would be able to elect to pay any resulting liability over an eight-year period. Limitations period for assessment of tax on these mandatory inclusions are extended to six years.
  70. 70. 702018 Tax Law Changes New Partnership Audit Rules Effective for partnership taxable years beginning after December 31, 2017;  Exams conducted, Adjustments Assessed and Collected at the partnership level;  All partners are bound by a final determination in the partnership audit proceeding  Partners do not have the right to participate in the audit proceeding or receive notice of the proceedings from the IRS (Unlike under TEFRA)  Only partnership‐level statute of limitations apply– a partner’s statute of limitations is no longer taken into account (unless the partnership elects out of the new rules)  Partnership can elect to file adjusted partner statements (quasi amended K‐1s) for each partner for the “reviewed year”
  71. 71. 712018 Tax Law Changes New Partnership Audit Rules Partnership Agreements must be amended to assign partnership representative:  “Partnership Representative” has the sole authority to act on behalf of the partnership.  PR must be a “person” with a substantial U.S. presence. • The term “person” includes, an individual, trust, estate, partnership, association, company, or corporation.  PR is not required to be a partner in the partnership (i.e., now the CFO can serve in this role)  IRS will appoint a PR if the partnership does not designate one.
  72. 72. 722018 Tax Law Changes New Partnership Audit Rules Election out for “small” partnerships  Partnerships with 100 partners or less can opt out of the entity‐level partnership determination  Election‐out is an annual election  The election must include a disclosure of the name and TIN of the each partner  Partners must be individuals, C corporations (including any foreign entity that would be treated as a C corporation if domestic), S Corporations or estates of deceased partners (no upper‐tier partnerships)  S corporation shareholders must be counted for purposes of the 100 partner test and disclosed to the IRS  The partnership must notify each partner of the election out.
  73. 73. 73 Questions ?
  74. 74. 74 Contact Information www.withum.com Email or Call Dawn Darnell (617) 849-6178 ddarnell@withum.com Robert Traester (617) 849-6166 rtraester@withum.com
  75. 75. 75 Extra Slides
  76. 76. 762018 Tax Law Changes Individual Changes-Tax Rates Taxable Income Rate $0 - $9,525 10% $9,525 – $38,700 12% $38,700 – $82,500 22% $82,500 – $157,500 24% $157,500 – $200,000 32% $200,000 – $500,000 35% $500,000+ 37% Single Married Filing Jointly Taxable Income Rate $0 - $19,050 10% $19,050 – $77,400 12% $77,400 – $165,000 22% $165,000 – $315,000 24% $315,000 – $400,000 32% $400,000 – $600,000 35% $600,000+ 37%
  77. 77. 772018 Tax Law Changes Individual Changes-Tax Rates Taxable Income Rate $0 - $13,600 10% $13,600 – $51,800 12% $51,800 – $82,500 22% $82,500 – $157,500 24% $157,500 – $200,000 32% $200,000 – $500,000 35% $500,000+ 37% Head of Household Estates & Trusts Taxable Income Rate $0 - $2,550 10% $2,550 – $9,150 24% $9,150 – $12,500 35% $12,500+ 37%
  78. 78. 782018 Tax Law Changes Individual Changes-Tax Rates – Capital Gains Income 2017 2018 $0 - $38,600 0% 0% $38,601 - $425,800 15% 15% $425,800+ 20% 20% Single Married filing Jointly Income 2017 2018 $0 - $77,200 0% 0% $77,201 - $479,000 15% 15% $479,000+ 20% 20%
  79. 79. 792018 Tax Law Changes Individual Changes- Standard Deduction & Exemptions Standard Deduction  The standard deduction increases from $6,350/$12,700 (single/MFJ) to $12,000/$24,000.  $18,000 for Head of Household (an unmarried individual with at least one qualifying child). Personal Exemptions  Personal exemptions are suspended starting in 2018.
  80. 80. 802018 Tax Law Changes Expanded Child Tax Credit Child tax credit increased  For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000.  $1,400 of the credit is refundable. New temporary $500 credit for other dependents  Credit is allowed for each dependent other than a qualifying child. Substantially Increased Income Thresholds  Prior Law: • Phase-out began at $75,000 for single individuals or heads of households, $110,000 for married individuals filing joint returns.  New Law: • Phase-out begins at $400,000 for married individuals filing joint returns, $200,000 for all others.
  81. 81. 812018 Tax Law Changes Individual Alternative Minimum Tax AMT remains for 2018 but with increased exemption Amounts  Joint returns and surviving spouses, $109,400.  Single Taxpayers, $70,300.  Rates are still 26% & 28%. Significantly higher phase-out of AMT exemption:  Exemption amounts reduced to an amount equal to 25% of the amount by which the taxpayer's alternative minimum taxable income (AMTI) exceeds: • $1,000,000 – Joint Returns and Surviving Spouses. • $500,000 – All other taxpayers (other than estates and trusts). Most AMT adjustments are gone:  Personal Exemptions.  State and local income taxes.  Other miscellaneous itemized deductions.
  82. 82. 822018 Tax Law Changes Individual Changes – Itemized Deductions State Taxes: The aggregate deduction for an individual's state and local real property taxes; state and local personal property taxes; state and local income taxes; and general sales taxes is limited to $10,000  For amounts paid in a tax year beginning before Jan. 1, 2018, with respect to State or local income taxes, beginning after Dec. 31, 2017, the payment is treated as if paid on the last day of the tax year for which such tax is imposed for purposes of applying the limitation of the deduction. Home Equity: Loan Interest on home equity debt is suspended. Mortgage Interest: Mortgage interest on home acquisition debt is limited to underlying debt of up to $750,000 incurred after Dec. 15, 2017.  Mortgage debt incurred prior to December 15, 2017 is grandfathered under the prior law ($1,000,000 limit). Refinancing does not subject the debt to the new limits.  For tax years beginning after Dec. 31, 2025, the limitation reverts back to $1,000,000 regardless of when the debt was incurred.
  83. 83. 832018 Tax Law Changes Individual Changes – Itemized Deductions Cash contributions to public charities and certain private foundations- the 50% of AGI limitation is increased to 60%. Contributions exceeding the 60% limitation generally may be carried forward and deducted for up to five years, subject to the later year's ceiling. Miscellaneous itemized deductions, that are subject to the 2%-of-adjusted- gross-income (AGI) floor, are no longer deductible, including:  Tax preparation fees  Investment management fees  Unreimbursed employee business expenses  Estate planning fees Pease limit on itemized deductions is suspended. Under prior law, the otherwise allowable amount of certain itemized deductions was reduced by 3% of the amount of a taxpayer's AGI exceeding a threshold amount; the total reduction couldn't be greater than 80% of all itemized deductions. Medical Expenses: Allowable subject to a 7.5% of AGI floor in 2017 and 2018.
  84. 84. 842018 Tax Law Changes Individual Changes – Other Tax on unearned income of a child (“Kiddie tax”) modified to apply tax rates for estates and trusts to child's net unearned income. Inflation adjustments now based on chained CPI-U instead of the CPI-U. Personal casualty losses are nondeductible unless attributable to a federally declared disaster. Alimony no longer deductible to the payor or taxable to the recipient for divorce agreements entered into starting in 2019. Gambling expenses can now offset gambling winnings. Moving expense deduction eliminated. 529 Plans can now be used for more than college education, including elementary and high school.
  85. 85. 852018 Tax Law Changes Individual Changes – Excess Losses & NOL Starting in 2018 “excess business losses” of a taxpayer other than a corporation are limited to $500,000 ($250,000 if single).  An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain plus the threshold amount. Excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. Net Operating Losses: For years after 2017, the NOL deduction is limited to 80% of taxable income.  NOLs can only be carried forward (indefinitely) and can no longer be carried back.
  86. 86. 86 Sourcing of Sales – Tangible Personal Property Generally included in the state where the item is shipped If that jurisdiction does not tax it, you may have to “throwback” the sale to the state it was shipped from
  87. 87. 87 Sourcing of Sales – Services and Intangibles Two main methods: Cost of Performance Based upon where the income producing costs are incurred Market Based Sourcing Assigns the receipts from services to the locations of the customers or where the customers are receiving the benefit of the service Issues may arise if the location of the benefit cannot be readily determined States rules differ – contact your accountant for specifics More and more states are moving towards market based sourcing
  88. 88. 882018 Tax Law Changes Pass-through Change: 20% Qualified Business Deduction What is a “qualified business?”  Any “trade or business” other than: A specified service business, or the business of being an employee. What is a “specified service business”?  Section 199A references Section 1202(e)(3)(A), which states: "any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.“  Section 199A Removes architects and engineers from the list of disqualified businesses and adds the following as disqualified businesses: investing and investing management, trading, or dealing in securities, partnership interests, or commodities. Regulations are expected on the application to tiered partnerships.
  89. 89. 892018 Tax Law Changes Revoking an S Election For the first year, any distributions as a C corporation will NOT be taxed as a dividend to the extent of the Accumulated Adjustments Account. (They will thus be tax-free to the extent of stock basis). For the second year after revocation, the distributions will be allocated pro-rata between the E&P of the corporation (and thus taxed as dividends) and the AAA of the former S corporation (and thus be tax-free to the extent of stock basis). In addition, any Section 481 adjustment resulting from the revocation (for example, a required switch from the cash method to the accrual method) will be taken in over 6 years rather than 4 years. In order to use these rules, the same shareholders must own the former S corporation in the same percentages two years after the revocation.
  90. 90. 902018 Tax Law Changes Partnership Changes Repeal of partnership technical termination rule.  A partnership no longer terminates upon sale of 50% or more of its interests during 12 month period. Mandatory Section 754 adjustment.  You have a “substantial build in loss” and most step down the basis of partnership assets if either: (1) the partnership's adjusted basis in the partnership property exceeds by more than$250,000 the fair market value of the property, or (2) the transferee partner would be allocated a loss of more than $250,000 if the partnership assets were sold for cash equal to their fair market value immediately after the transfer. Basis reduction for partnership charitable contributions amended.
  91. 91. 912018 Tax Law Changes Bonus Depreciation 100% expensing will apply to:  Tangible property with recovery period of 20 years or less  Computer software  Qualified improvement property  “qualified film or television production” and a “qualified live theatrical production.” It will not be allowable on assets depreciated using the ADS method. It will not be allowed to car dealerships deducting floor plan financing interest. Depreciation of listed property:  For passenger autos with a weight of less than 6,000 lbs • $10,000 for year 1 • $16,000 for year 2 • $9,600 for year 3 • $5,760 for all other years until fully depreciated  If you claim 100% expensing, you can take an additional $8,000 for year 1 on listed property.  If you purchase an SUV (weight > 6,000 lbs) the luxury auto rules don’t apply. You can deduct the FULL COST in year 1 under the bonus depreciation rules.
  92. 92. 922018 Tax Law Changes Business Interest Limitation Adjusted taxable income is taxable income BEFORE:  Any income/deduction/gain/loss not properly allocable to a trade or business,  Any business interest expense or income  Any net operating loss deduction  Any depreciation, amortization, or depletion deductions.  Section 199A deduction
  93. 93. 932018 Tax Law Changes New Paid Family and Medical Leave Tax Credit – §45S An eligible employer is allowed the credit equal to the applicable percentage of the wages paid to qualifying employees during any period in which those employees are on family and medical leave  Credit is between 12.5% and 25%, as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019.  The amount of family and medical leave taken into account for any employee for any tax year can't exceed 12 weeks.  Eligible employer: any employer who has in place a written policy allowing (1) qualifying full - time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave.  Qualifying employees: any employee who 1) has been employed by that employer for 1 year or more, and 2) was paid less than $72,000 in 2018.  Paid leave cannot be vacation leave, personal leave, or medical or sick leave, as defined in FMLA section 102(d)(2). A taxpayer can't take both a credit and a deduction for amounts for which the paid family and medical leave credit is claimed.
  94. 94. 942018 Tax Law Changes Compensation Changes Section 83(i): In limited circumstances, an employee who exercises a nonqualified stock option or is granted restricted stock to settle a RSU can elect to defer the recognition of income until the EARLIER OF:  The date the stock becomes transferrable  The date the employee ceases to be an employee  The date the corporation goes public  Five years from vesting, or  The date the employee revokes the election. The amount of income is determined on the earlier of:  The date the stock is transferable, or  No longer subject to a substantial risk of forfeiture No changes to Payroll taxes - Still be due on the earlier of vesting/transferability.
  95. 95. 952018 Tax Law Changes Compensation Changes (83(i)) Qualified employee: one who isn’t:  A 1% owner  The current or former CEO  Related to one of the above  One of the four highest compensated employees Eligible corporation:  Stock is not publicly traded  The corporation has a written plan under which at least 80% of employees are granted options or RSUs under the same terms
  96. 96. 962018 Tax Law Changes New Partnership Audit Rules Or may prefer to pay tax at entity level:  Total tax due for reviewed year may be less than under §6226  No 1411 tax (Net investment income tax)  Interest rate lower by 2%  Section 6226(c)(2)(C) imposes a 5 percent increase above the federal short‐term rate for an imputed underpayment that is pushed out, while an imputed underpayment that is paid at the partnership level is subject to a 3 percent increase.  Penalties may be less (may be no “substantial understatement” at partnership level whereas may be a “substantial understatement” at partner level.