Presented by: Donald S. Johnston

1. Tax Reform: Understanding the Basics Presented by: Donald S. Johnston

2. OVERVIEW OF THE DAY • Understanding the basics of the TCJA • Impact on families and individuals • Impact on pass-through entities • Impact on businesses • Other tax issues • Revenue recognition and changes to lease accounting

3. Understanding the Basics of the tcja • Tax Cuts and Jobs Act passed on December 20, 2017, enacted on December 22, 2017

4. Understanding the Basics of the tcja • Goals of proposed legislation • Tax relief for middle-class families • Simplicity of “postcard” tax filing for vast majority of Americans • Tax relief for businesses, especially small businesses • End incentives for shipping jobs, capital, tax revenue overseas • Broaden tax base and provide greater fairness for all Americans by closing special interest tax breaks and loopholes

5. Understanding the Basics of the tcja • What you need to know: • Individual changes – rates, itemized deductions and exemptions have dramatically changed, change to child tax credit, standard deduction nearly doubled • Pass-through deduction –20% for qualifying business owners • Business changes –tax rates, interest expense limitations, accelerated depreciation changes

6. IMPACT ON FAMILIES AND INDIVIDUALS • Note that all individual provisions are TEMPORARY • For tax years beginning in 2026, the TCJA provisions sunset, and pre-TCJA laws kick back in

7. IMPACT ON FAMILIES AND INDIVIDUALS • Changes to the standard deduction Single Head of Household Married filing joint • Change will benefit those who would not have been itemizing • The increased standard deduction will substantially reduce the number of taxpayers who itemize

8. IMPACT ON FAMILIES AND INDIVIDUALS • Repeal of the deduction for personal and dependency exemptions • The TCJA temporarily repeals the deduction for personal and dependency exemptions for tax years beginning after December 31, 2017, and before January 1, 2026

9. IMPACT ON FAMILIES AND INDIVIDUALS • Expansion of the child tax credit • Increased and expanded to address negative outcome created by the repeal of deductions for personal and dependency exemptions • Previously, taxpayer could claim up to $1,000 for each qualifying child; now, the credit is $2,000, and the related phase-out thresholds are increased

10. IMPACT ON FAMILIES AND INDIVIDUALS • Prior to the TCJA, the primary itemized deductions consisted of: • Medical expenses • State and local taxes • Mortgage and home equity interest • Charitable donations • Miscellaneous itemized deductions • Expanded • Limited • Limited • Expanded • Eliminated

11. IMPACT ON PASS-THROUGH ENTITIES

12. Impact on pass-through entity income • The TCJA aims to reduce tax for pass-through business ownersby creating a new 20% pass-through deduction for qualified taxpayers

13. IMPACT ON PASS-THROUGH ENTITIES • What are pass-through entities? • S-Corporations • Partnerships • LLCs taxed as Partnerships or S Corporations • Sole Proprietorships • Certain rental property entities

14. IMPACT ON PASS-THROUGH ENTITIES • Mechanics of the QBI Deduction • An individual can claim the deduction for the sum of: • The lesserof: • “20% of the combinedqualified business income,” or 20% of the excess of the taxpayer’s taxable income, overthe sumof: (i) the taxpayer’s net capital gain, and (ii) the taxpayer’s aggregate qualified cooperative dividends • PLUS, the lesserof: − 20% of the taxpayer’s aggregate qualified cooperative dividends; or • the taxpayer’s taxable income, minus the taxpayer’s net capital gain

15. The qbi deduction – example 1

16. The qbi deduction – example 2

17. The qbi deduction – example 3

18. IMPACT ON PASS-THROUGH ENTITIES • QBI Deduction – the fine print • The deduction may be disallowed if: • Your taxable income is too high, and you are either an SSTB and/or youfail the wage/qualified property test • MFJ income test $315,000 - $415,000 – phase-in begins • Single income test $157,500 - $207, 500 – phase-in begins • SSTB issues • Wage/qualified property issues

19. IMPACT ON PASS-THROUGH ENTITIES • Lender Warning: • The QBI deduction may lead to certain changes to the way a business pays its partners going forward • Some partnerships are eliminating or reducing guaranteed payments, which increases book income and EBITDA • Cash-out flows from the partnership are the same, but the income is inflated (as compared to prior years)

20. LENDER Warning: GUARANTEED PAYMENT CHANGES

21. IMPACT ON PASS-THROUGH ENTITIES • Summary Considerations Related to the QBI Deduction • Taxable income below the thresholds should allow for a deduction at 20% of QBI without limitation • If the results of the W-2 wages/qualified property test exceed 20% of QBI, all owners should be able to take the QBI deduction at 20% of QBI (in consideration of other pass-through entities) (Unless the pass-through entity constitutes a Specified Service Trade or Business)

22. IMPACT ON PASS-THROUGH ENTITIES • Summary Considerations Related to the QBI Deduction • If the pass-through entity results fail to meet the W-2 wages/qualified property test, the taxpayer will have to work through the W-2 wages/qualified property limits calculations to determine the amount of the QBI deduction

35. IMPACT ON BUSINESSES

36. IMPACT ON BUSINESSES • Corporate income tax rate reduction • Permanently reduced to a 21% flat rate(graduated rates ranging from 15% to 35% under prior law) • Effective for tax years beginning after December 31, 2017

37. IMPACT ON BUSINESSES • Business interest limitation • Changes to bonus depreciation rules (temporary) • Section 179 expensing (permanent) • Simplified accounting rules for small businesses • This one is a big deal!

38. CONCLUSION AND PRACTICAL CONSIDERATIONS

39. CONCLUSION AND PRACTICAL CONSIDERATIONS • Individuals should consider: • QBI deduction • Expansion of standard deduction, loss of personal and dependent exemptions • Ramifications of losing state and local income tax deduction, miscellaneous deductions, home office deductions • Assessing charitable giving strategies

40. FINAL THOUGHTS • Other Important Matters: • Understanding your current and future tax consequences (income, and sales tax) • Pennsylvania tax awareness • U.S. Supreme Court case (South Dakota v. Wayfair)

41. FASB ASC TOPIC 842

42. LESSEE ACCOUNTING

43. Overview of new leases standard

44. LESSEE ACCOUNTING • Balance sheet gross up – potential impact on ratios • Possible increase in number of finance leases – lease term consideration • Better visibility for lenders on balance sheet

45. Revenue recognition • Eliminates the transaction and industry-specific revenue recognition guidance under current GAAP • Replaces it with a principles-based approach for determining revenue recognition • (Largely) converged standard with IFRS 15

46. Effective dates • Public entities • Effective for annual reporting beginning after 12/15/17, including interim periods within reporting period • Nonpublic entities • Effective for annual reporting periods beginning after 12/15/18 and interim periods in annual periods beginning after 12/15/18 • Early adoption is permitted in annual periods beginning after 12/15/16

47. Five-step process • Identify the contract with a customer (Agreement) • Identify the separate performance obligations (Distinct) • Determine the transaction price (Consideration) • Allocate the transaction price to the separate performance obligations (Stand-alone) • Recognize revenue when or as the entity satisfies each performance obligation (Control)

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