Tax Cuts & Jobs Act – Business Provisions

2. Tax Cuts & Jobs Act – Business Provisions

3. Overview of business changes Corporate rate reduction to flat 21% Repeal of corporate AMT Special rules for pass-throughs (Sec 199A) Loss limitation for other than C Corps (Sec 461) Repeal of Sec 199 (DPAD) Expensing of assets Increases to Sec 179 ($1 million and threshold $2.5 million) Expanded accounting method exceptions for small businesses Changes to various fringe benefits including treatment of meals and entertainment paid by employer Limit on use of and carryback of NOL Limitation on interest expense deduction for non-small businesses (over $25 million receipts); limited exceptions Corporate shift from worldwide to territorial system

4. Corporate rate changes • Flat rate of 21% • Effective for years beginning after 12/31/17 • Fiscal year corporations should apply Sec 15 • Personal service corporations taxes at same rate (no more surtax) • Corporate AMT has been repealed • Dividends received deduction reduced

5. Effect on Accounting for Income Taxes under FASB ASC 740 • Effect on calculation of deferred tax liabilities/assets (due to change in rate) • Additional complications related to fiscal year corporations

6. 20% Pass-through deduction • 20% of qualified business income (QBI) • Deduction limited to lesser of 20% of QBI or the greater of • 50% of wages OR 25% wages + 2.5% UBIA (defined below) • Qualified business income • Qualified trade/business income • Not a specified trade/business(involving performance of service) • Does not include investment income • Does not include reasonable compensation paid from S corporation or guaranteed payments paid to a partner • Phase-out limitation

7. 20% Pass-through deduction…continued • Unadjusted Basis Immediately after Acquisition (UBIA) • Qualified tangible property (NOT raw land) • Basis is not reduced by depreciation • Only qualified during a year which the depreciable period has not ended before the end of the tax year • Depreciable period begins on date of service and ends the later of • 10 years after date of service • Last day of the last full year in applicable recovery period

8. 20% Pass-through deduction…continued • Aggregation rules • Commonly controlled businesses • Same person or group of persons directly or indirectly own 50% or more of each business aggregated (does not need to be person aggregating). • Family attribution – spouse, children, grandchildren, parents • Must satisfy 2 of the following: • Must have similar products (or be offered together) • Must share facilities or significant centralized business elements • Must be operated in coordination with or reliance on others

9. Partnership change • Repeal of technical provisions • Greater than 50% ownership change (12 months) • No longer an automatic termination • No need to “close the books” • No short year returns • Effective for years after 12/31/17

10. Depreciation • Additional first year/bonus depreciation • 100% for property acquired after 9/27/17 • Phase down schedule for years after 2022 • Now allowed for new AND used property • Qualified improvement property • New definition and recovery life • Luxury auto limits • Note that additional $8,000 depreciation has been extended for 2017 • Increases to Sec 179 • $1 million and threshold of $2.5 million • SUV limitation remains at $25,000 • Limits are indexed for inflation • Expansion for certain real property (roofs, HVAC) • Allows residential rental property

11. Accounting methods for small taxpayers • Expanded availability of cash method • Inventory tracking requirements • Sec 263A threshold raised • Expanded availability of completed contract method

12. Restrictions on interest deductions • Deductible interest limited to • Interest income for the year PLUS • 30% of taxable income PLUS • Taxpayers financing interest for the year • Limitation at the taxpayer level • Interest not deductible carries forward indefinitely • Doesn’t apply to taxpayers that meet $25 million gross receipts test

13. Changes to fringe benefits and entertainment expenses • Repeal of business entertainment expenses • Repeal of deduction for qualified transportation fringe benefits • Repeal of exclusion for bicycle commuting reimbursement • Repeal of exclusion for employee reimbursed moving expenses • Other changes to employee fringe benefits

14. Net operating loss provisions • No longer allowed to carryback NOLs • Carried forward indefinitely • Maximum of 80% of taxable income may be reduced by NOL

15. Other changes to note • New limits on executive compensation deduction • Changes for Sec 1031 exchanges • Changes to carried interest rule • Expenses for employer operating eating facilities is no 50% (rather than fully deducible) • Lobbying costs no longer deductible • New credit for paid family and medical leave

16. Planning for 2018 and forward • Guidance needed on Sec 199A (pass-through deduction) • Definitions: qualified business income; qualified trade/business; small business • Effect of corporate rate reduction to 21% on choice of entity • Debt structure due to interest limitations • Entertainment expenses • Changes to fringe benefits and effect on employees

17. Tax Cuts & Jobs Act – Individual Provisions

18. Overview of individual changes • Largest overhaul to the tax code since 1986 • Majority of changes to individual taxation are “temporary” • Federal changes only (no changes to Michigan or city taxes)

19. The basics • Still seven tax brackets, income ranges for each bracket has increased • 10%, 12%, 22%, 24%, 32%, 25%, 37% • Increase in standard deduction • Personal and dependency exemptions are temporarily repealed • Higher child tax credit ($2,000), new $500 non-child dependent credit • Individual AMT not repealed, but exemption amounts have increased • Penalty to maintain insurance coverage is repealed for 2019 and forward • Adjustments to itemized deductions (see below)

20. Itemized deductions changes • Repeal of the overall limitation on itemized deductions • Medical deduction threshold is 7.5% for 2018 • Reverts to 10% starting in 2019 • Home equity interest no longer deductible • State and local tax deduction is limited to $10,000 ($5,000 if MFS) • Misc deductions subject to 2% threshold no longer deductible

21. Effects on net investment income tax (NIIT) • Investment fees and state income tax (amount attributable to investment income) reduce investment income to lower the amount subject to NIIT • Since investment fees no longer deductible and state income tax is limited, this will likely cause an increase in the amount subject to NIIT

22. Other individual changes to note • Casualty losses: only from federally declared disasters • Alimony: deduction/inclusion repealed for divorces executed after 12/31/18 • Moving expenses deduction repealed • Kiddie tax now at trust/estate tax rates • 2018 estate and gift tax exemptions increased • Education tax benefit changes • Charitable contribution changes

23. Proposed changes not included in the final bill • All were in either the House or Senate Bill • Additional standard deduction for elderly and blind • $250 above-the-line teacher deduction is not changed • Exclusion for employer-provided dependent care assistance • Exclusion for adoption assistance programs • Reduction of capital gain rates/changes to taxation of interest income • Sec. 121 exclusion of gain on sale of principal residence • Required use of FIFO to determine basis of stock dispositions • Charitable driving remains at 14 cents/mile (rather than actual) • Consolidation and modification of education provisions not included (only change is to expand 529 plans) • Plug-in electric vehicle credit (Sec. 30D)

24. Questions? THANKYOU!