Tax Strategies for a New Environment NCPA 2018 Annual Convention - PDF document

9/30/2018 Tax Strategies for a New Environment NCPA 2018 Annual Convention Ollin Sykes, CPA.CITP, CMA Scotty Sykes, CPA Scotty Sykes, Ollin B. Sykes, Sykes & Co. CPA,CGMA CPA.CITP, CMA 1

9/30/2018 Tax Strategies for a New Tax Environment NCPA 2018 Annual Convention Ollin Sykes, CPA.CITP, CMA Scotty Sykes, CPA Sykes & Co. Disclosure • Ollin Sykes is the President of Sykes & Co. The conflict of interest was resolved by peer review of the slide content. • Scotty Sykes is an employee of Sykes & Co. The conflict of interest was resolved by peer review of the slide content. 2

9/30/2018 Learning Objectives 1. Illustrate changes to the tax code that will affect community pharmacies in 2018 and beyond. 2. Summarize the impact of bonus depreciation expansion on your business’s growth. 3. Discuss the pass-through deduction for qualified pharmacy income. Agenda • Tax Cuts & Jobs Act of 2017 • Individual Highlights • Business Highlights • Cash Method Accounting • Section 199A QBI Deduction • Proactive Tax Planning • Comprehensive Example 3

9/30/2018 Tax Cuts & Jobs Act of 2017 Tax Cuts & Jobs Act of 2017 (TCJA) • First major tax reform in over 30 years • Will impact pharmacy owners • Most changes start 2018 • Most provisions expire after 2025 • Rev. Proc. 2018-40 • Proposed Regulation 1.199A 4

9/30/2018 Individual Highlights Individual Highlights • Seven tax brackets • No more dependent exemption • Increase in standard deduction • Higher child tax credit ($2,000) • AMT tax not repealed but exemptions & phaseouts increased • Net Operating Loss changes (NOL) 5

9/30/2018 Itemized Deductions • Repeal of overall limitation on itemized deductions • Medical deduction 7.5% of AGI for 2018, 10% starting 2019 • Mortgage/Home equity interest limitations Itemized Deductions • State, Local, Real Estate tax deduction limited to $10,000 • 2% Misc. Deductions (home office, investment fees, etc.) no longer deductible • Charity limitations increased to 60% of AGI 6

9/30/2018 Business Highlights Corporate Tax Rate • Change in C Corporation tax rate to 21% effective after 12-31-17 • Planning for S to C tax structure will require extensive planning • Corporate AMT tax repealed • Net Operating Loss changes (NOL) 7

9/30/2018 Domestic Production Activities Deduction (DPAD) • Applicable to compounders • Repealed in 2018 • Analysis needed if DPAD not taken in previous years Research & Development Credit (R&D Tax Credit) • Potentially applicable to compounders • Credit not impacted by TCJA • Four step process to ensure eligibility • Analysis needed if not taken in previous years 8

9/30/2018 Meals & Entertainment • Documentation required • Entertainment expenses - REPEALED • Holiday Office Parties/Summer Picnics (All staff invited) – 100% deductible Meals & Entertainment • Meals for employees on the road for work and the convenience of the employer are 50% deductible • Meals with vendors/suppliers or to build relationships, either 50% deductible or nondeductible (Guidance needed) 9

9/30/2018 Section 263A: UNICAP • Tax increase for larger pharmacies • Revenues > $10 million pre 2018 • Revenues > $25 million TCJA • Very complex • Many pharmacies noncompliant Depreciation • Bonus depreciation allows 100% write-off in 2018, limitations apply • Section 179 allows 100% write-off in 2018, limitations apply • Applies to new and used assets • Must be placed in service • Multi-year planning suggested 10

9/30/2018 Delivery Vehicles • Increase in first year deprecation of $10,000 from $3,160 • 1031 exchange of vehicles has been REPEALED • Planning opportunities for vehicles over 6,000 lbs. • Documentation required Cash Method of Accounting 11

9/30/2018 Cash Accounting Method • Major fundamental change • Taxpayer friendly • Will impact financial reporting • IRS Revenue Procedure 2018-40 Cash Accounting – Prior TCJA • Generally, pharmacies required to report accrual basis accounting for tax purposes • Many pharmacies incorrectly reported cash basis for tax 12

9/30/2018 Cash Accounting - TCJA • Expanded the use of the cash method of accounting for tax reporting • Available for pharmacies < $25 million in gross receipts the prior three years Cash Accounting - Inventory • Must continue to use an accounting method for inventories that either: • Treats as non-incidental materials & supplies; or • Conforms to taxpayer’s financial accounting treatment 13

9/30/2018 Cash Accounting – Form 3115 • Form 3115 Change in Accounting Method • 481(a) adjustment is taken in year of change if negative (expense) • If positive (income), 481(a) adjustment can be taken in year 1 if under $50,000 or over a four year period if greater than $50,000 Cash Accounting – Overview • Controlled groups must be considered for gross receipts test • Cash basis tax and books issues • Existing cash basis pharmacy taxpayers = no benefit 2018 14

9/30/2018 Section 199A QBI Deduction Section 199A: QBI Deduction • Qualified trade or businesses are entitled to a deduction equal to 20% of taxpayer’s qualified business income (QBI) • Can be extremely complex • IRS Proposed Regulation 1.199A 15

9/30/2018 Eligible Entities • Sole proprietors – Schedule C • LLCs • Partnerships • S Corporations • Rental Property limitations • Not C Corporations Qualified Business Income (QBI) • Qualified business income (QBI) is essentially the net trade or business income from the pharmacy • Does not include reasonable compensation/guaranteed payments paid to the taxpayer from the pharmacy 16

9/30/2018 Qualified Trade or Business Defined • Every business except: • Trade or business of performing services as an employee (W2) • Specified service trade or business (SSTB) Specified Service Trade or Business • Any trade or business involving the performance of services in the fields of health , law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management 17

9/30/2018 Specified Service Trade or Business • Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Health Defined • Performance of services in the field of health means the provision of medical services by physicians, pharmacists , nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals who provide medical services directly to a patient . 18

9/30/2018 Health Defined Continued • The performance of services in the field of health does not include the provision of services not directly related to a medical field, even though the services may purportedly relate to the health of the service recipient. Health Defined Continued • For example, the performance of services in the field of health does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or research, testing, and manufacture and/or sales of pharmaceuticals or medical devices. 19

9/30/2018 How Does it Work? • General Rule/SSTB Exception • Phased-In Deduction • Limited Deduction • Determined separately for each qualified trade or business General Rule/SSTB Exception • Full 20% deduction eligible if taxable income is less than - • $315,000 or less for married filing joint • $157,500 or less for single • Even SSTB are entitled to the General Rule under the thresholds 20

9/30/2018 General Rule • No W-2 limitations • Pharmacy owners want the “General Rule” • Decrease taxable income with proactive tax planning Phase-in Deduction • Deduction phased-in if taxpayer’s taxable income is - • between $315,000 and $415,000 for MFJ • between $157,500 and $207,500 for Single • SSTB still eligible in this range 21

9/30/2018 Limited Deduction • Deduction limited if taxpayer’s taxable income is - • over $415,000 for married filing joint • over $207,500 for single • SSTB is not eligible Limited Deduction • Deduction is first limited to the greater of: • 50% of taxpayers allocable share of W2 wages paid by the business 22

9/30/2018 Limited Deduction Cont. • Sum of 25% of taxpayers allocable share of W2 wages paid by the business, plus • 2.5% of the taxpayers allocable share of the unadjusted basis immediately after acquisition of all qualified property (tangible property subject to depreciation) Limited Deduction • Deduction is then subject to a second limitation equal to 20% of the excess of: • Taxable income for the year, over • The sum of net capital gain 23

9/30/2018 Other Important Considerations • Aggregation Rules • De Minimis Rule • W2 Wages and Notice 2018-64 • Real Estate • QBI Losses Proactive Tax Planning 24

9/30/2018 Tax Planning • Tax planning is necessary to take advantage of TCJA • Reduction of taxable income as it relates to Section 199A • Fundamental accounting is critical • Be proactive Tax Planning Process • Step 1 – Project gross income • Step 2 – Consider tax strategies to reduce taxable income • Step 3 – Consider Section 199A opportunities • Step 4 – Implement plan 25