TAX SEMINAR Jill Eggerichs Rock, CPA, JD Smith Schafer & - PowerPoint PPT Presentation

TAX SEMINAR Jill Eggerichs Rock, CPA, JD Smith Schafer & Associates, Ltd. 1

TOPICS FOR DISCUSSION 1. C. Corp Specific Changes: AMT, Rates, NOL 2. All Entity Changes: Meals & Entertainment, Depreciation (including Like Kind Exchanges), Business Interest, Credits, Accounting Methods 3. Flow-Through Issues: 199A, Partnership Audit Rules 4. Sales Tax/Nexus Changes: Wayfair 5. Individual Tax Changes: AMT, Rates, Business Losses, Itemized Deductions 6. Opportunity Zones 7. MN State Impact Smith Schafer & Associates, Ltd. 2

C CORP SPECIFIC CHANGES Smith Schafer & Associates, Ltd. 3

C CORP • AMT = REPEALED • Rate = 21% • NOL = Limited to 80% of taxable income – MN Law updated 5/30/19 to conform to 80% of federal limitation. MN law applies retroactively and applies to losses generated in years prior to the tax reform. Federal law only applies to losses generated after 2017. • With the new lower rate – should my business consider converting from S corp to C Corp? Smith Schafer & Associates, Ltd. 4

CHANGES FOR ALL BUSINESS ENTITIES

MEALS AND ENTERTAINMENT Type of Expenditure Pre-TCJA (2017) Post-TCJA (2018 and beyond) Client Meals 50% 50% Entertainment for Clients 50% Not Deductible Entertainment for 100% 100% employees or as part of employee party Meals offered to the 100% 100% public Meals for employer 100% 50% convenience Office 100% 50% coffee/soda/snacks Smith Schafer & Associates, Ltd. 6

OTHER EMPLOYEE FRINGE BENEFITS • Parking – Reasonable cost associated with employee parking – Exception for parking provided for the safety of employees – Exception for parking lots that have greater than 50% customer/public use Smith Schafer & Associates, Ltd. 7

DEPRECIATION • Bonus Depreciation 100% – Assets placed in service after Sept 27, 2017 – Assets with =< 20 year life – Computer software – Qualified improvement property – Both new and used MN Law updated 5/30/2019 – now conforms to federal asset types and requires an 80% add-back for assets placed in service after 9/27/17 – effective retroactively. Smith Schafer & Associates, Ltd. 8

DEPRECIATION • Bonus Depreciation Continued – Not allowed if deducting floor-plan interest. • IRS Clarification on 9/13/19: may be allowed if requirements of 163(j) business interest limitation are met. – No definition of “qualified leasehold property” after 1/1/18. • Consensus in the industry is that this will not be updated any time soon. Smith Schafer & Associates, Ltd. 9

DEPRECIATION • Luxury Auto limits No Bonus: Year 1: 10,100, Year 2: 16,100, Year 3: 9,700, Year 4+: 5,760 With Bonus: Year 1: 18,100 (years 2-4+ same as with no bonus) • §179 Limits – $1,020,000, Phaseout at $2,550,000 – Expanded definition of qualified real property to include HVAC, Roofs, and other items of real property – SUV of $25,500 (but qualified for 100% bonus depreciation – so bonus depreciation is better) – Clarification issued 9/13/19: if 179 is taken on a luxury auto no additional depreciation may be taken until the end of the useful life (5 years) Smith Schafer & Associates, Ltd. 10

LIKE KIND EXCHANGES • Only Real Property Qualifies • Update to MN 5/30/19: now conforms to federal treatment of this Smith Schafer & Associates, Ltd. 11

BUSINESS INTEREST EXPENSE • > $25M Gross Receipts or a “Tax Shelter” – Gross Receipts test requires taxpayer to add together all related entities – What is a tax shelter? • Syndicates count! This means if 35% of loss is flowing to passive investors, you may be subject to this rule! • Limited to: – 30% of Adjusted Taxable Income + Business Interest Income + Floor Plan Financing Interest – Adjusted taxable income is EBITDA • MN law update 5/30/19: conforms to this treatment retroactively Smith Schafer & Associates, Ltd. 12

TAX CREDITS • Rehab – 20% over 5 years – MN Law Updated 5/30/19 – conforms to federal for applications made after 12/31/17 • Repeal of Tax Credit Bonds • Paid FMLA credit Smith Schafer & Associates, Ltd. 13

ACCOUNTING METHODS • Cash Method • Accounting for Inventories • Unicap • Accounting for Long Term Contracts Smith Schafer & Associates, Ltd. 14

PASSTHROUGH ENTITIES

INCREASED REPORTING REQUIREMENTS • S Corporation Shareholders – Must report basis to the IRS if: • Loss allocated from K-1 • Distribution from K-1 • Basis limitations exist • Partnerships – Must report capital accounts on a cash basis starting in 2019. – If capital accounts on a tax basis cause negative partner capital in 2018, must report those amount to the IRS by 3/15/2020 or 2018 return will be subject to non-filing penalty! Smith Schafer & Associates, Ltd. 16

PARTNERSHIP AUDIT RULES - Change to how partnerships are audited; tax is paid at the entity level on a partnership audit – rather than passing out amended K-1s - Partnerships with > 100 partners or certain partners are always subject to these rules - Partnerships with < 100 partners and no “special” partners can elect out of these rules - If you do not elect out – amended returns are subject to Administrative Adjustment Request Smith Schafer & Associates, Ltd. 17

199A DEDUCTION Basic Mechanics: 20% x Business Income *subject to some limits

CATEGORIES OF TAXPAYERS • Income < 321,400 (MFJ) or 160,700 (all others) – 20% of QBI, only limited based on taxable income • Income between 321,400 and 421,400 (MFJ) or 160,700-210,700 (all others) – Phase out of 2% per 10,000 OR subject to limits below • Income > 421,400 (MFJ) or 210,700 (all others) – Non – Specified Service Business • 20% of QBI, limited to 50% of wages or 25% of wages + 2.5% of assets – Specified Service Business • NO DEDUCTION

WHAT IS A SPECIFIED SERVICE BUSINESS? 199A-5: principal asset is the reputation or skill of the employees or owners – Health – Law – Accounting – Actuarial – Performing Arts – Consulting – Athletics – Financial Services – Brokerage Services – Investment Management – Trading Services – Dealing in Securities – Also includes rent by related party to SSB

WHAT ABOUT RENTALS? • IRS Issued Safe Harbor Rules – 250 or more hours of service on the property – Must have contemporaneous records • Rentals to a related passthrough automatically qualify (subject to the same limits as the related passthrough). • IRS has excluded triple net leases, but other considerations exist • Other rentals may qualify under the IRS rules of Section 162 trade or business. Smith Schafer & Associates, Ltd. 21

PLANNING OPPORTUNITIES • Maximize W-2 Wage/QBI • Consider filing MFS • Aggregate where applicable • Consider rents

SALES TAX

SALES TAX – WAYFAIR DECISION • On June 21, 2018, the U.S. Supreme Court issued (by a 5-4 vote) decision in South Dakota vs. Wayfair . • Old standard: physical presence • New standard: substantial nexus • Physical presence is not required to meet the “substantial nexus”, but when a taxpayer “avails itself of the substantial privilege of carrying on business in that jurisdiction” – SD Law: sales volume and dollar amounts were high enough to illustrate this. – SD part of the streamlined sales tax. Smith Schafer & Associates, Ltd. 24

Smith Schafer & Associates, Ltd. 25

WAYFAIR, CONTINUED • While Wayfair principally addressed nexus in the context of sales tax, it also effectively endorsed assertions by states that physical presence was not a prerequisite for the imposition of income tax and other entity-level taxes. • Many states have enacted economic nexus laws for income/business taxes that create a filing responsibility based on revenue in the state. Smith Schafer & Associates, Ltd. 26

INDIVIDUAL INCOME TAX

TAX RATES – 7 INDIVIDUAL BRACKETS Rate Single Married HOH MFS 10% $0 $0 $0 $0 12% $9,701 $19,400 $13,850 $9,701 22% $39,476 $78,951 $52,851 $39,476 24% $84,201 $168,401 $84,201 $84,201 32% $160,726 $321,451 $160,701 $160,726 35% $204,101 $408,201 $204,101 $204,101 37% $510,301 $612,351 $510,301 $306,176 Smith Schafer & Associates, Ltd. 28

TAX RATES – CAPITAL GAINS Rate Single Married HOH MFS 0% $0 $0 $0 $0 15% $39,375 $78,750 $52,750 $39,375 20% $434,550 $488,850 $461,700 $434,550 Smith Schafer & Associates, Ltd. 29

TAX RATES – ESTATES AND TRUSTS Rate Lower Threshold Upper Threshold 10% $0 $2,600 24% $2,600 $9,300 35% $9,300 $12,750 37% $12,750 And up Smith Schafer & Associates, Ltd. 30

ESTATE, GIFT, AND GST TAXES 2018 2019 Federal exemption $11.18M $11.4M MN exemption $2.4M $2.7M Minnesota extends to $3M for 2020 and later Smith Schafer & Associates, Ltd. 31

KIDDIE TAX • Taxable income of a child (under age 19 or if the child is a full-time student, under age 24) attributable to earned income taxed under the rate for single individuals • Unearned income would be taxed under the trust and estate rates • For 2019, kiddie tax is triggered with unearned income exceeding $2,200 Smith Schafer & Associates, Ltd. 32