Tax Reform & PE Funds: What You Need to Know NOVEMBER 29, 2017 - PDF document

11/28/2017 Tax Reform & PE Funds: What You Need to Know NOVEMBER 29, 2017 Brett Palmer Rick Klahsen Damien Martin National Tax Assistant Director President of SBIA Partner drmartin@bkd.com bpalmer@sbia.org rklahsen@bkd.com 1

11/28/2017 1 How do we get tax reform? WHAT WE’LL COVER TODAY What’s happened so far? 2 How do the House & Senate tax bills 3 compare? What are some tax planning 4 considerations? • Republican Donald J. Trump elected to serve as 45th president of the United States HOW DO WE GET TAX • Republican majority in House of Representatives REFORM? • 241 Republican • 194 Democrat Political environment in Washington—2016 election results • Republican majority in Senate • 52 Republican • 46 Democrat • 2 Independent 2

11/28/2017 • House: All 435 seats up for election • Senate: 33 seats up for election (Class I) HOW DO WE • 9 Republican • 23 Democrat GET TAX • 1 Independent REFORM? Political environment in Washington—2018 mid-term election Source: latimes.com WHAT’S HAPPENED SO FAR? 06.22.2016 04.26.2017 07.27.2017 Significant tax reform developments House President Joint Statement Blueprint Trump’s on Tax Reform released guidelines released released 3

11/28/2017 Significant tax reform WHAT’S developments HAPPENED SO FAR? 10.26.2017 11.02.2017 11.09.2017 09.27.2017 Tax Cuts and Unified House passed TCJA pass in Jobs Act of Framework Senate’s House Ways & 2017 (TCJA) released budget Means introduced in Committee | Senate bill the House introduced WHAT’S HAPPENED SO FAR? After By Thanksgiving Christmas 11.16.2017 2017 2017 Significant tax reform developments TCJA passed Pass in Senate President’s in House | desk for Senate version signature passed in Finance Committee 4

11/28/2017 House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) Flat rate of 20 percent Flat rate of 20 percent HIGHLIGHTS OF Corporate tax rate Top rate of 35 percent (effective 1/1/2018) (effective 1/1/2019) TAX BILLS Personal service COMPARED Flat rate of 35 percent Flat rate of 25 percent Flat rate of 20 percent corporations Business House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) Deduction of 17.4 percent HIGHLIGHTS OF 25 percent rate applied to of domestic qualified Individual rate on ordinary 30 percent of net active business income limited to Pass-through tax rate TAX BILLS income business income under 50 percent of W-2 default provision (1) wages (2) ; expires after COMPARED 12/31/2025 Business (1) Default provision treats remaining 70 percent as wage income subject to ordinary individual rates. This default categorization is not available to professional service firms. An alternative calculation based on actual level of capital investment is also available. A reduced rate is provided for small businesses (2) Deduction does not apply to specified service businesses, except in case of taxpayer whose taxable income does not exceed $250,000 for single filers ($500,000 married filing jointly) with a phaseout beginning at the same levels over the next $50,000 ($100,000) of taxable income 5

11/28/2017 House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) 100 percent through 2022 100 percent through 2022 HIGHLIGHTS OF for qualified property for qualified property placed in service after placed in service after TAX BILLS 40, 30 & 20 percent bonus 9/27/2017 (1) ; excludes 9/27/2017; excludes depreciation for qualified property used in regulated certain property used in COMPARED property in 2018–2020, public utilities, real property regulated public utility Bonus depreciation respectively; property must trade or businesses & businesses; includes be new to qualify property used in a trade or qualified film, television & Business business that has floor live theatrical productions plan financing placed in service before indebtedness 2023 (1) Definition of qualified property expanded by removing requirement that original use begin with taxpayer House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) Up to $5 million; Phaseout HIGHLIGHTS OF Up to $520,000; Phaseout beginning at $20 million of Up to $1 million; Phaseout Section 179 expensing beginning at $2,070,000 of assets placed in service; beginning at $2.5 million of TAX BILLS assets placed in service provision set to expire assets placed in service (1) 12/31/2022 COMPARED Business (1) Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems 6

11/28/2017 House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) Deduction limited to 30 Deduction limited to 30 HIGHLIGHTS OF percent of entity’s adjusted percent of entity's adjusted Deduction allowed for Interest expense taxable income; excess taxable income; excess interest expense TAX BILLS carried forward up to five carried forward years (1) indefinitely (2) COMPARED Business (1) Adjusted taxable income is taxable income without regard to business interest expense, business interest income, net operating loss (NOL), amortization, depreciation & depletion. This deduction is not limited for any taxpayer that meets $25 million gross receipts test, is a regulated public utility business or a real property business (2) Adjusted taxable income is taxable income without regard to items not properly allocable to a trade or business, any business interest expense or business interest income, the 17.4 percent pass-through income deduction & any NOL deduction. Interest deduction is not limited for any taxpayer that meets a $15 million gross receipts test, is a regulated public utility business (including electric cooperatives) or a real property business. Farming businesses may elect not to be subject to limitation provided they use ADS method to depreciate farming property with recovery period of 10 years or more House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) Deduction limited to 90 Deduction limited to 90 HIGHLIGHTS OF percent of taxable income; percent of taxable income no carryback; carried Carried back two years & for tax periods after 2017 & TAX BILLS forward indefinitely with Net operating loss (NOL) carried forward 20 years 80 percent for tax periods carryforward amount after 2022; no carryback; COMPARED adjusted by an interest carried forward indefinitely* factor to preserve value Business * Repealed after 2025 if on-budget federal revenue exceeds $27.487 trillion by an amount greater than or equal to $900 trillion for the period 10/1/2017 through 9/30/2026 7

11/28/2017 House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) Tax credit available to HIGHLIGHTS OF Research & development businesses that develop Explicitly retained (1) Explicitly retained* (2) credit new or improved products TAX BILLS or processes COMPARED Business *Repealed if on-budget federal revenue exceeds $27.487 trillion by an amount ≤ $900 trillion for the period 10/1/2017 through 9/30/2026 (1) For tax periods beginning after 12/31/2022, certain research & experimentation expenses, including software development costs, would be required to be capitalized & amortized over a five-year period. For foreign research projects, this amortization period Increases to 15 years (2) For tax periods beginning after 12/31/2025, certain research & experimentation expenditures, including software development costs but excluding land acquisition & improvement costs & mine (including oil & gas) exploration costs, would be required to be capitalized & amortized over a five-year period. For foreign research projects, this amortization period increases to 15 years. Upon retirement, abandonment or disposition of property, any remaining basis would continue to be amortized over remaining amortization period. In addition, an additional reporting requirement & penalty for failure to file is added for tax periods beginning after 12/31/2024* House Bill Senate Bill Proposal Current Tax Law (Passed 11/16/2017) (Updated 11/16/2017) 14 percent rate for 10 percent for cash/cash HIGHLIGHTS OF Untaxed accumulated cash/cash equivalents, 7 equivalents, 5 percent Not addressed foreign earnings percent otherwise, payable otherwise, payable over TAX BILLS over eight years eight years Worldwide income tax COMPARED Territorial system with base Territorial system with base Future foreign earnings based on residence & erosion provisions (1) erosion provisions (1)(2) source Business (1) 100 percent of foreign-sourced portion of dividends paid by foreign corporation to U.S. corporate shareholder owning 10 percent or more of foreign corporation’s stock exempt from U.S. taxation. No foreign tax credit or deduction allowed for any foreign taxes paid or accrued with respect to any exempt dividend (2) Provides an election to preserve NOLs & coordinate NOL, overall foreign loss & foreign tax credit carryforward rules upon transition 8