Christopher G. Sivak, CPA Event: Tax Changes, Family Succession Planning & Your Business (August 20, 2018)

1. Tax Cuts and Jobs Act:
Impact on Your Business
Christopher G. Sivak, CPA

2. 2
Three Principals for Tax Reform
1. Simplifying the personal tax code
2. Providing tax relief to the middle class
3. Businesses get a competitive tax rate

3. 3
Individual Rate Changes
Individual rate reduction and brackets (rates sunset at
the end of 2025)
Rate Unmarried, taxable
income over
Married Joint, taxable
income over
Head of Household,
taxable income over
10% $0 $0 $0
12% $9,525 $19,050 $13,600
22% $38,700 $77,400 $51,800
24% $82,500 $165,000 $82,500
32% $157,500 $315,000 $157,500
35% $200,000 $400,000 $200,000
37% $500,000 $600,000 $500,000

4. 4
Business Rate Changes
Corporate tax rate
• Flat rate of 21% (effective 1/1/2018) also
applies to Personal Holding companies
Corporate Alternative Minimum Tax (AMT)
• Repealed
• AMT credits refundable from 2018 through 2021 and can
offset regular tax liability.

5. 5
Business Expensing
Bonus Depreciation:
• A 100% first year deduction for the adjusted basis is
allowed for qualified property placed in service after
9/27/2017 and before 1/1/2023.
• Allowed for both new and used property.
• The first-year bonus depreciation deduction phases down
to 80%, 60%, 40% and 20% for property placed in service
in 2023, 2024, 2025 and 2026 respectively.

6. 6
New Limitations on Meals and
Entertainment Expenses
• Entertainment expenses are no longer deductible (for
example: sporting events, concerts, golf, etc.)
 Exception for company holiday party; still 100% deductible
• Meals
 Associated with client entertainment and employee travel – still
50% deductible
 Provided to employees for convenience of employer – 100%
deductible under old law, 50% under new law (nondeductible after
2025)

7. 7
Net Operating Losses (NOL)
• NOL’s limited to 80% of taxable income for tax periods
after 12/31/2017
• No carryback except for certain losses incurred in trade or
business of farming
• Can be carried forward indefinitely

8. 8
Interest Expense
Cap on net business interest expense (every business,
regardless of form)
• Limited to 30% of “adjusted taxable income”, business interest
income and floor plan financing interest of the taxable year
• Adjusted taxable income = taxable income without regard to:
 Net interest expense
 NOLs
 Depreciation, amortization and depletion
• Unused expense carried carryforward indefinitely
• Businesses with less than $25M average annual gross receipts
exempt

9. 9
Example 1: Interest Expense
Limitation
ABC Co. has taxable income of $150,000. Included in that amount is $10,000 of interest income,
$100,000 of interest expense, $120,000 of depreciation and $10,000 of amortization. The adjusted
taxable income and limitation is computed as follows:
Taxable income $150,000
Interest income – $10,000
Interest expense + $100,000
Depreciation + $120,000
Amortization + $10,000
Adjusted taxable income $370,000
When multiplied by 30%, the preliminary limitation is $111,000. The total limitation is $111,000 plus
interest income of $10,000, or $121,000. Because interest expense of $100,000 is less than the limitation,
the entire interest expense is deductible.

10. 10
Example 1: Interest Expense
Limitation (continued)
Consider the same facts as above, except taxable income is now $50,000.The adjusted taxable income
is computed as follows:
Taxable income $50,000
Interest income – $10,000
Interest expense + $100,000
Depreciation + $120,000
Amortization + $10,000
Adjusted taxable income $270,000
When multiplied by 30%, the preliminary limitation is $81,000. The total limitation is $81,000 plus interest
income of $10,000, or $91,000. Because of the limitation, ABC Co. can only deduct $91,000 of interest
expense.
The disallowed interest expense of $9,000 is then carried forward indefinitely.

11. 11
Qualified Business Income
Deduction
S corporations, Partnerships or Sole proprietorship:
 New deduction for Pass-through income (“Deduction for
“domestic qualified business income”)
• Deduction of 20% of domestic qualified business income (QBI)
for taxpayers engaged in a “qualified trade or business”; subject
to limitation, expires 12/31/2025.
• QBI is defined as the net amount of qualified items of income,
gain, deduction and loss with respect to trade or business.
• The deduction reduces taxable income, rather than adjusted
gross income.

12. 12
Qualified Business Income
Deduction
Qualified Trade or Business = all trades businesses except:
• The trade or business of performing services as an
employee, and
• “Specified service" trades or businesses, those involving
the performance of services in:
 Health
 Law
 Accounting
 Actuarial sciences
 Performing arts
 Consulting
 Athletics
 Financial services
 Brokerage services,
 Or where the business's principal asset is the reputation or skill of one or more owners or employees

13. 13
Qualified Business Income
Deduction
 Limitations:
The deduction cannot exceed the greater of:
 50% of the W-2 wages with respect to the qualified trade or
business, or
 The sum of 25% of the W-2 wages plus 2.5% of the unadjusted
basis of all qualified property.
 Taxpayers over “Threshold” amount : $157,500 for
single filers ($315,000 married filing joint)

14. 14
Qualified Business Income
Deduction
Certain types of Income excluded from QBI:
 Capital gains or losses
 Dividends
 Interest Income ( unless interest is properly allocable to
the business
 Employee compensation
 Guaranteed payments to a partner

15. 15
Example 2: QBI Deduction
Acme Manufacturing, owned by Jane Acme, is a pass-through entity and has the following income
statement:
Sales $14,000,000
Cost of goods sold $(9,000,000)
Gross margin $5,000,000
Selling, general & administrative $(4,000,000)
Net income $1,000,000
The company incurred wage expense of $1,800,000 and the unadjusted basis of its qualified property is
$7,000,000.

16. 16
Example 2: QBI Deduction
(continued)
Jane Acme’s QBI deduction is the lesser of:
20% of Qualified Business Income $200,000, or
The greater of:
50% of Wages $900,000
Or 25% of wages, plus $450,000
2.5% of the unadjusted basis of qualified property $175,000 $900,000
$625,000
Jane Acme’s QBI deduction is $200,000. If Jane is taxed at the new highest marginal rate of 37% the QBI
deduction reduces her tax from $370,000 (37% of $1,000,00) to $296,000 (37% of $800,000 and 29.6%
of $1,000,000).

17. 17
Example 3: QBI Deduction
Same as Example 2 except cost of goods sold is $5,000,000 instead of $9,000,000:
Sales $14,000,000
Cost of goods sold $(5,000,000)
Gross margin $9,000,000
Selling, general & administrative $(4,000,000)
Net income $5,000,000
The company incurred wage expense of $1,800,000 and the unadjusted basis of its qualified property is
$7,000,000.

18. 18
Example 3: QBI Deduction
(continued)
Jane Acme’s QBI deduction is the lesser of:
20% of Qualified Business Income $1,000,000, or
The greater of:
50% of Wages $900,000
Or 25% of wages, plus $450,000
2.5% of the unadjusted basis of qualified property $175,000 $900,000
$625,000
Jane’s QBI deduction is limited.
What happens if Acme Manufacturing pays Jane a bonus of $200,000?

19. 19
Example 3: QBI Deduction
(continued)
Jane Acme’s QBI deduction is the lesser of:
20% of Qualified Business Income (20% x $4,800,000) $960,000, or
The greater of:
50% of Wages $1,000,000
Or 25% of wages, plus $500,000
2.5% of the unadjusted basis of qualified property $175,000 $1,000,000
$675,000
Jane’s QBI deduction increases by $60,000 from $900,000 to $960,000. Her W-2 income increases by
the same amount that her pass-through income decreases. The additional QBI deduction reduces her
income tax by $22,200 (37% of $60,000). (The savings is offset by a minor amount of payroll tax on the
bonus.)

20. 20
Proposed Regulations - QBI
Issued August 8, 2018, the regulations provide:
• Anti-abuse measures to prevent
“Crack and Pack” strategy
Relabeling employees as independent contractors
• Minor service income exception (10% if <$25 million, 5% if
>$25 million)
• Aggregation Rules

21. 21
QBI Proposed Aggregation Rules
• Taxpayer requirements:
 Same person or group owns 50% or more of aggregated businesses
 50% test must be satisfied for most of taxable year
 All aggregated items must be reported on returns with same tax year
 Specified services trades or businesses cannot be aggregated
• Aggregated businesses must meet two of three factors:
 They provide products/services customarily offered together
 Share facilities or significant centralized business elements
 Operated in coordination with, or reliance upon, one or more of the
businesses in the group

22. 22
Accounting Methods
Expanded use of cash method of accounting
• Businesses with gross receipts of $25M or less permitted
to use cash method. Includes those that have inventory
UNICAP
• Businesses with gross receipts of $25M or less are
exempt.
Long-term contracts
• Businesses with gross receipts of $25M or less can use
completed contract method.

23. 23
Example 4: Manufacturer
Converting to Cash Basis
Acme Manufacturing is pass-through entity and has
the following income statement and select balance
sheet attributes:
Sales $14,000,000
Cost of goods sold $(9,000,000)
Gross margin $5,000,000
Selling, general & administrative $(4,000,000)
Net income $1,000,000
Accounts receivable $1,800,000
Inventory:
Raw materials $800,000
WIP $400,000
Finished goods $700,000
$1,900,000
Accounts payable and accruals $(1,500,000)
Acme’s WIP consists of $200,000 of raw materials and $200,000 of labor and overhead. Their finished
goods consists of $300,000 of raw materials and $400,000 of labor and overhead.

24. 24
Example 4: Manufacturer Converting to
Cash Basis (continued)
The benefit of converting from the accrual method to the cash method of accounting is determined as
follows.
Accounts receivable $1,800,000
Labor and overhead in inventory ($200,000 + $400,000) $600,000
Accounts payable and accruals $(1,500,000)
Net amount of income deferred $900,000
Cash tax savings at 29.6% (37% top individual tax rate reduce by
Qualified Business Income deduction) $266,400

25. 25
Deemed Repatriation Provision
Deemed repatriation of offshore profits
• One-time transition tax on previously untaxed foreign earnings
• Post-1986 E&P not previously subject to U.S. tax
• Taxpayer may elect to pay this tax liability
over a period of up to eight years
• 15.5% on cash and cash equivalents
• 8% on non-cash earnings and profits

26. 26
Qualified Opportunity Fund
Qualified Opportunity Funds (“QOF”) permit investors to defer recognition
of capital gain on recent sales
• Gain must be reinvested in QOF not more than 180 days after a sale
or exchange and no later than December 31, 2026
• QOF must hold at least 90% of its assets in “qualified opportunity zone
property”
• Gain is reduced by 10% if QOF is held at least 5 years; 15% if held at
least 7 years
• Gain is eliminated if QOF is sold after 10th anniversary of investment

27. 27
Contact Information
27
Christopher G. Sivak, CPA
Partner
csivak@skodaminotti.com
330-576-1832