Individual / Corporate Tax Update November 15, 2018

1. Chris McElroy, CPA Schneider Downs & Co., Inc. cmcelroy@schneiderdowns.com Dr. K. Bryan Menk, Associate Professor Duquesne University menkk@duq.edu Individual / Corporate Tax Update November 15, 2018

2. Agenda • Individuals • Pass-through Entities • Corporations • Business Provisions • Qualified Opportunity Zones • Planning Hot Topics

3. Federal Tax Update Individuals

4. Federal Tax Update – Individuals • Tax Rate Changes • Standard Deduction and Personal Exemptions • Itemized Deductions • State and Local Taxes • Mortgage Interest • Miscellaneous Itemized Deduction • Child and Dependent Tax Credit • Kiddie Tax • Section 529 Plans

5. Federal Tax Update – Individuals 2018-2025

6. Federal Tax Update – Individuals • Standard deduction increased (2018 – 2025) • $12,000 (S) • $24,000 (MFJ) • Personal exemptions repealed (2018 – 2025)

7. Federal Tax Update – Individuals

8. Federal Tax Update – Individuals • State & local income & property taxes (2018 – 2025) • Combined limit of $10,000 • Limit does not apply to property taxes paid in connection with a trade or business

9. Federal Tax Update – Individuals 12,000 15,000 10,000

10. Federal Tax Update – Individuals • Itemized deductions modified (2018 – 2025) • Mortgage interest deduction - debt limit reduced from $1M to $750k • Charitable contributions limit increased to 60% of AGI • Casualty loss deduction limited to federally-declared disasters • Deduction for medical expenses – threshold reduced from 10% to 7.5% of AGI (2017 – 2018) • Itemized deductions repealed (2018 – 2025) • Interest on home equity loans • Miscellaneous itemized deductions • 3% Itemized Deduction Limitation repealed (2018 – 2025)

11. Federal Tax Update – Individuals Child and Dependent Tax Credit • Child tax credit increased to $2,000 (2018 – 2025) • Refundable portion limited to $1,400 • Phase-out increased from $110K to $400K (MFJ)

12. Federal Tax Update – Individuals Section 529 Plans • Effective January 1, 2018, qualified withdrawals for federal tax purposes have been expanded to include up to $10,000 in tuition, per year, per beneficiary, in connection with enrollment or attendance at public, private, or religious elementary or secondary schools. • Pennsylvania allows a deduction for contributions to any state plan

13. Federal Tax Update – Individuals Alternative Minimum Tax (2018 – 2025) • Exemption increased • $109,400 (MFJ) • $70,300 (S) • Phase out threshold increased • $1,000,000 (MFJ) • $500,000 (S)

14. Federal Tax Update – Individuals

15. Federal Tax Update – Individuals

16. Federal Tax Update – Individuals

17. Federal Tax Update – Individuals Estate and Gift Taxes (2018 – 2025) • Lifetime exclusion doubled • $11.2M for 2018 ($22.4M for married couples) • Basis step-up retained • 40% tax rate remains unchanged • Gift tax • Annual exclusion maintained • $15k for 2018 • Planning implications – make gifts before expiration of law on 12/31/25

18. Federal Tax Update Pass-through Entities

19. Federal Tax Update – Section 199A Deduction for Qualified Business Income – Section 199A (2018 – 2025) • 20% deduction from income of partnerships, S-Corps and sole proprietorships • Limited to the greater of: • 50% of W-2 wages paid by the business, or • 25% of W-2 wages plus 2.5% of unadjusted basis of depreciable property • Determined for each separate business (i.e., no aggregation of wages among commonly-controlled entities) • Overall limitation - 20% of taxable income in excess of capital gains • Deduction is from adjusted gross income but is not an itemized deduction, so is available to all taxpayers

20. Federal Tax Update – Section 199A Deduction for Qualified Business Income – Section 199A (2018 – 2025) • Deduction is not available to “specified service businesses” • Health, law, accounting, consulting, athletics, performing arts, financial, investment and brokerage services • Principal asset is the reputation or skill of one or more of its employees or owners • Exemption from limitations for taxpayers with taxable income less than $315,000 (MFJ) or $157,500 (S) • Wage limitation does not apply • Prohibition against specified service businesses does not apply • Exemptions are phased out for income between $315,000 and $415,000 (MFJ), or $157,500 and $207,500 (S)

21. Federal Tax Update – Section 199A

22. Federal Tax Update – Section 199A

23. Federal Tax Update – Pass-through Entities Partnerships - Carried Interest • Net long-term capital gain with respect to an “applicable partnership interest” • Treated as short-term capital gain for investments sold by the partnership that have been held for three years or less • Applicable partnership interest • Transferred to or held by taxpayer in connection with the performance of services (e.g., a profits interest) in an “applicable trade or business” • Applicable trade or business • Securities • Commodities • Real estate held for rental or investment • Cash or cash equivalents, and • Options and derivatives with respect to any of the above

24. Federal Tax Update – Pass-through Entities Partnerships – Repeal of Technical Termination Rule • Repeals technical termination rule under IRC Section 708(b)(1)(B) • Applied when 50% or greater interest in the partnership was sold • Partnership now only terminates under Section 708(b)(1)(A) if no part of business is carried on by any of the partners • Welcome change for tax preparers • No more surprise short-year returns • No restart of depreciation • Effective for tax years beginning after 12/31/17

25. Federal Tax Update Corporations

26. Federal Tax Update - Corporations • Corporate tax rate – 21% (flat rate) beginning in 2018 • No special rate for personal service corps • AMT – repealed • Minimum tax credit • 50% refundable (2018 – 2020) • 100% refundable (2021) • Election to claim minimum tax credits in lieu of bonus depreciation – repealed

27. Federal Tax Update - Corporations • Dividends-received deduction modified • 70% deduction reduced to 50% • 80% deduction reduced to 65% • Tax-free contributions to capital to exclude: • Contributions in aid of construction • Contribution by a customer or potential customer • Contribution by a government entity (non-shareholder) • Applies to contributions made after 12/22/17 • Corporate provisions are permanent

28. Federal Tax Update Business Provisions

29. Federal Tax Update – Business Provisions Depreciation • Bonus depreciation • 100% for qualified property placed in service after 9/27/17 and before 1/1/23 • Must be first use by the taxpayer (need not be new) • Decreasing percentages for years 2023 – 2026 • Depreciation caps on luxury autos increased • All “qualified improvement property” was not assigned a 15-year life by the final bill; therefore, it does not qualify for bonus • Excludes any assets with floor-plan financing debt

30. Federal Tax Update – Business Provisions

31. Federal Tax Update – Business Provisions

32. Federal Tax Update – Business Provisions

33. Federal Tax Update – Business Provisions

34. Federal Tax Update – Business Provisions Depreciation • Section 179 expense • Expensing limit increased to $1M • Investment limitation of $2.5M • Expansion of eligible qualified real property • Lodging restriction (179(d)(1)) removed • Effective for tax years beginning after 12/31/17 • Made permanent and adjusted for inflation

35. Federal Tax Update – Business Provisions Accounting Methods (tax years beginning after 12/31/17) • Options for all businesses with average gross receipts less than $25M for the prior three years • Use of cash method of accounting • Inventory accounting - exemption from Section 471 • Account for as non-incidental materials and supplies, or • use same method as financial statements or books and records • Exemption from Section 263A • Contractors - exemption from percentage-of-completion method for contracts to be completed within two years (adopt on a cut-off basis)

36. Federal Tax Update – Business Provisions Interest Expense • Deduction limited to interest income plus 30% of “adjusted taxable income” • Adjusted taxable income = taxable income before interest expense, NOLs and depreciation and amortization (e.g., EBITDA) • Exclusion for floor plan interest • Exclusion for investment interest • Elective exclusion for interest from a real property trade or business, election requires the use of ADS for depreciation of assets • Exemption for businesses with average gross receipts under $25M for prior three years • Unused amounts can be carried forward indefinitely

37. Federal Tax Update – Business Provisions Interest Expense • Special rules for partnerships and S-corps • Limitation is determined at the entity level • Disallowed interest is passed through and treated by the owners as interest expense paid in the next succeeding year, and can only be used to the extent that the entity has “excess taxable income” in future years • “Excess taxable income” of the entity must first be applied to carryforward interest expense, and is then available to offset other interest expense • Owner’s distributive share of income from a pass-through entity not included in determining “adjusted taxable income” (prevents double counting) • Effective for tax years beginning after 12/31/17

38. Federal Tax Update – Business Provisions Net Operating Losses • General repeal of NOL carryback except for farming and property insurance businesses • Unlimited carryforward period • NOL deduction limited to 80% of taxable income • Applies to NOLs arising in taxable years beginning after 12/31/17 • Carryforwards and carrybacks originating from earlier years are unaffected

39. Federal Tax Update – Business Provisions Excess business losses of individuals not allowed • “Excess business losses” are defined as: • Aggregate deductions from all trades or businesses in excess of aggregate gross income plus $500k (MFJ) • For partnerships and S-corps, the rules are applied at the partner/shareholder level • Passive activity limitations are applied first • Disallowed amounts are treated as NOL carryovers • Applies to taxable years 2018 - 2025

40. Federal Tax Update – Business Provisions Miscellaneous business provisions • Like-kind exchanges • Only allowed for real property • Transitional rule provided for personal property relinquished or acquired prior to 12/31/17 • R&D expenses • Mandatory five-year amortization (15 years for foreign R&D) • Also applies to software development expenses • Mid-year convention applies • Effective for R&D expenses incurred after 2021

41. Federal Tax Update Qualified Opportunity Zones

42. Federal Tax Update – Qualified Opportunity Zones

43. Federal Tax Update – Qualified Opportunity Zones New Sections 1400Z -1 and 1400Z-2 • 1400Z-1 deals with creating and designation of zones. • 1400Z-2 deals with the benefits to taxpayers Goal Designed and created to attack poverty and improve economically distressed areas by spurring economic development and job creation is distressed communities. Congress hopes to achieve this by potentially unlocking large amounts of capital through the use of tax incentives available for investing in designated areas. It’s estimated there is $6.1 trillion of unrealized gains sitting as paper profits in the hands of corporations and individuals and that some portion of this would be put to work to revitalize these communities. Rather than through government handouts of taxpayer dollars, investors will directly invest money into projects they believe will succeed with the tax benefit attraction of permanently excluding a portion of existing gains and all future gains (assuming holding period requirements are met).

44. Federal Tax Update – Qualified Opportunity Zones 1400Z-2 Special Rules For Capital Gains Invested in Opportunity Zones Three Main Benefits • Deferral of current realized gain • Permanent exclusion of up to 15% of current gain • Replacement property held 5 (10%) and 7 years (additional 5%) • Permanent exclusion of 100% of future appreciation • Replacement property held more than 10 years Two Main Investor Requirements • Realized capital gain stemming from sale to unrelated party • Proceeds reinvested within 180 days into an “Opportunity Fund” • Direct investment by an individual in qualified opportunity zone property will not work

45. Federal Tax Update – Qualified Opportunity Zones • What is an Opportunity Fund? • A partnership • A corporation (“C” or “S”) • Formed for the purpose of investing in qualified opportunity zone property • Who can form an Opportunity Fund? • Anyone • Individuals • Investment and Real Estate Promoters • Tax Exempt Organizations • What does the Opportunity Fund invest in? • Opportunity zone business • Stock or partnerships operating a qualified opportunity zone business in a qualified zone

46. Federal Tax Update Year-end Planning Considerations

47. Federal Tax Update - Planning Hot Topics • Impact of increased standard deduction – will itemized deductions exceed standard deduction? • Any benefit for mortgage interest or charitable contributions? • Use of donor advised funds for charitable contributions • Accounting method change opportunities (receipts < $25M) • Cash basis • Inventories/263A • Long-term contracts • Review impact of interest expense limitations – debt / equity structures • Planning and structuring to maximize the 20% deduction for pass-through entities • Use of Qualified Opportunity Zones

48. Federal Tax Update - Planning Hot Topics S-corp vs. C-corp? S-corp • Maximum all-in fed tax rate is 29.6% • 80% x 37% C-corp • Maximum all-in fed tax rate is 39.8% • 21.0% corp • 18.8% on dividend (79% x 23.8%)

49. Federal Tax Update Questions?