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Final Version Renamed and Signed Into Law Dec 22, 2017
Effective for 2018 Onward

Welcome Surprise for Businesses

• Many industries will benefit from new tax cuts: retail, hospitals, oil
  and gas, real estate, construction, agriculture, and realtors and
  manufacturers
• However, interest deduction limitation to business interest income
  plus 30% of EBITDA can bite many businesses especially capital intensive
  ones

Tax Reform Bill – How Does It Affect Business?

Huge Tax Cut for Corporations:

• 21% flat tax rate for corporations

-As compared with top 35% graduated rate under current law

• Will benefit large corporations the most
• Corporate AMT (Alternative Minimum Tax) Repealed

Business Tax Changes – International Tax

• More immediate expensing of certain qualified property
• Like-kind exchanges limited to real property
• Net Operating Losses (NOL) limited to 80% of taxable income,
  indefinite carryforward period – rule becomes effective in 2022
• Most carrybacks eliminated

Tax Reform Bill – Pass Through Businesses

• Current: Pass Through Income – taxed at individual tax rates
• e.g. Most small businesses organized as S-corps, LLCs, LLPs, LPs, Sole
  Proprietorships – income passes through to and is taxed at individual income
  tax rates;
• Senate Plan: Deduction for 20% of pass through income for Service
  Business Owners:
• Deduction limited for service businesses (law firms, doctors’ offices etc.)
  for pass through income up to $315k MFJ/$157500 for Single filers
• Architects and Engineers are now excluded from definition of ‘specified
  service’ businesses;

Tax Reform Bill – Pass Through Businesses
(continued)

• What does this mean for Professional Service Businesses?
• 20% deduction is unlimited if the business is not Specified Service Business
• What are Specified Service Businesses?

Those providing services in the fields of Law, Accounting, Health, Actuarial
Science, Financial Services, Brokerage, Consulting and Athletics (excludes
Architectural and Engineering)

– Deduction applies at shareholder or partner level

Business Tax Changes – R&D Expenditures

• Changes to Research & Development (R&D) Expenses
• Must be capitalized and amortized over 5 years beginning in 2022,
  expensing for the next five years
• 15 years for amortization for overseas R&D

Business Tax Changes – Continued

• Changes to Orphan Drug Credit:
• Reduced from 50% to 27.5%
• More reporting requirements
• Meals provided by employer – no longer deductible after 2025;
• Most Federal tax credits remain unchanged (e.g. Worker Opportunity, New
  Markets; tax credits for solar and wind, plug-in electric vehicle etc.)

Repatriation Tax – International Tax

Prior rules: worldwide income is taxed, with tax credits for any foreign
tax paid.
New rules: territorial tax on domestic income – shift to participation
exemption doctrine;

One time transition tax:
– 8% tax on illiquid assets, payable over 8 years;
– 15.5% tax on cash and equivalents;

Tax Reform Bill – Individuals

Key Points:

• Individual tax cuts and changes expire in 2025;
• Senate bill removes ACA (Obamacare) mandate to have health insurance
  beginning in 2019; hence Americans will no longer be required by law to buy
  health insurance and there will be no tax penalty;
• Reduced top individual rate to 37% (for income over 500k Single/600k MFJ);
  35% rate for incomes between $200 and $500k;

Tax Reform Bill – Key Provisions

• Child Tax Credit increased to $2,000 from current $1,000 per child;
  more of it is now refundable
• Families with dependents and income under $400k will see an
  increase in refunds or lower tax bill
• Partnerships Interests for Personal Services – 3 year holding period
  introduced to qualify for Capital Gain treatment

Tax Reform Bill Compared to Current Tax Code

• Tax Brackets – Individual Income Tax:
• Current: seven income tax brackets – 10% to 39.5%
• New: seven brackets – 10% to 37%

Current vs. New Tax Law Compared

• New ‘animal’ – no current equivalent tax on overseas profits
• House: 14% and 7% tax on liquid and tangible assets respectively
• Senate: 10% and 7% tax rates on liquid and tangible assets respectively

Senate vs. House Plan – Compared: House vs. Senate Tax Plan – Estate Tax

• Standard Deduction:
• Current: $6,350 Single/$12,700 Married
• New: Single $24,000/$24,000 Married

Tax Plan Final Version – State and Local Tax
Deduction (SALT):

• Repeals SALT for income taxes but allows property tax deduction up
  to $10k
• Planning opportunity for 2017:
• Consider accelerating state income tax payments, real estate tax payments if
  itemized in 2016, likely to itemize deductions in 2017 and the total itemized
  deductions are projected at less than $24k (this opportunity has expired if you
  are reading this in 2018)

New Tax Ruled vs Current Law – Compared:
Business Expenses

Current tax law: multiple, complex regulations for business deductions

New: new equipment expensed over five years plus reduced
depreciation rules for real property

New Tax Law vs. Current Law– Compared:

• Current: $1k per child; eliminated if income exceeds $110k
• New: $2,000 credit per child, $500 for older dependents, eliminated
  over $500k for married taxpayers
• Mortgage Interest Deduction Reduced: can only deduct interest on
  mortgage up to $750k (from current $1mm)

What is NOT Changing?

• Retirement accounts – contribution limits remain the same (re 401k,
  IRA, Roth IRA)
• Medical expenses
• Student loan interest deduction
• Tuition Waivers for Graduate Students

New Tax Plan vs Current Law – Estate Tax

• Current Estate Tax (aka Death Tax): 40% tax on estates over $5.49m
• New: double the exclusion to $10.98m
• This means you can pass up to $22 million to your heirs tax free (assuming
  you are married)

Copyright – O’Brien Panchuk, LLP

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