Alternative Minimum Tax Pre ‐ Reform 2017 Reform Act Corporate Alternative Minimum Tax: Corporate Alternative Minimum Tax: • Applies to corporations with average gross receipts equal to or in excess of $7.5M over the preceding 3 tax years. www. lslcpas .com
Fixed Assets and Depreciation Pre ‐ Reform 2017 Reform Act Bonus Depreciation: Bonus Depreciation: • • The amount of bonus depreciation is 100% expensing for property placed in 50% of the cost of certain “qualified service after Sept. 27, 2017 . The property” placed in service during percentage that may be expensed for 2017. property placed in service after Dec. 31, 2022 is slowly reduced between 2023 and the end of 2026 to 20%. www. lslcpas .com
Fixed Assets and Depreciation Pre ‐ Reform 2017 Reform Act Bonus Depreciation for Non ‐ residential Real Bonus Depreciation for Non ‐ residential Real Estate Improvements: Estate Improvements: • Property had to qualify as “qualified • Consolidates to “qualified improvement leasehold improvement property”, property”. The term means any “qualified restaurant property”, and improvement to an interior portion of a “qualified retail improvement property”. building which is nonresidential real property (does not include enlargement of building, elevator or escalator, or internal structural framework). *To qualify, property must have a recovery period of 20 years or less. An oversight in the statute did not give qualified improvement property 15 year life as conference reports suggested. www. lslcpas .com
Fixed Assets and Depreciation Pre ‐ Reform 2017 Reform Act Section 179 Expensing: Section 179 Expensing: • Businesses may immediately expense up to • Increases the amount that a taxpayer may $500,000 ($510,000 for 2017) of the cost of expense under §179 to $1,000,000 . The Act any qualified property placed in service each also increases the phaseout threshold to tax year. If the business places in service $2,500,000. These amounts are indexed for more than $2 million ($2,030,000 for 2017) inflation for tax years beginning after 2018. of §179 property in a tax year, then the amount available for immediate expensing is • Expands the definition of qualified real reduced by the amount by which the cost of property to include all qualified improvement such property exceeds $2 million. property and certain improvements (roofs, heating, ventilation, and air ‐ conditioning property, fire protection and alarm systems, and security systems) made to nonresidential real property. www. lslcpas .com
Fixed Assets and Depreciation Pre ‐ Reform 2017 Reform Act Luxury Automobile Limitation: Luxury Automobile Limitation: • • A taxpayer may depreciate a A taxpayer may depreciate a maximum amount of: maximum amount of: • Year 1 ‐ $3,160 • Year 1 ‐ $10,000 • Year 2 ‐ $5,100 • Year 2 ‐ $16,000 • Year 3 ‐ $3,050 • Year 3 ‐ $9,600 • Year 4 and after ‐ $1,875 • Year 4 and after ‐ $5,760 www. lslcpas .com
Business Expenses Pre ‐ Reform 2017 Reform Act Deduction for Income Attributable to Deduction for Income Attributable to Domestic Production Activities: Domestic Production Activities: • Taxpayers may claim a deduction equal to 9% of the lesser of the taxpayer's qualified production activities income, which is derived from property that was manufactured, produced, grown, or extracted within the United States, or the taxpayer's taxable income for the tax year. www. lslcpas .com
Business Expenses Pre ‐ Reform 2017 Reform Act Interest Expense: Interest Expense: • Business interest is generally allowed as a • Limits the deduction for net interest expenses deduction. incurred by a business to the sum of business interest income, 30% of the business’s adjusted taxable income, and floor plan financing interest. Disallowed interest carried forward indefinitely. • Automobile dealerships that use the “floor plan financing interest” exemption are will not be eligible for bonus depreciation on qualified asset additions. IRC Section 179 will still apply. • Businesses with average annual gross receipts of $25 million or less are exempt from the limit. www. lslcpas .com
Business Expenses Pre ‐ Reform 2017 Reform Act Entertainment Expenses: Entertainment Expenses: • Employers can deduct 50% of expenses • Eliminates deduction allowed for associated with entertainment, amusement, entertainment, amusement, or recreational or recreational activities directly related to activities directly related to business. business. • Certain employer ‐ provided fringe benefits • Deduction for 50% of food and beverage are 100% deductible and excluded from an expenses associated with operating a trade or employees income (eg. de minimis fringes, business generally is retained and expanded qualified transportation fringes, and meals to include expenses associated with providing that are provided for the convenience of the food and beverages to employees for the employer). convenience of the employer. • Qualified transportation fringe benefits eliminated. www. lslcpas .com
Loss Limitations Pre ‐ Reform 2017 Reform Act Net Operating Loss Deduction: Net Operating Loss Deduction: • • Net operating losses may not be deducted in Limits the NOL deductions arising in tax years the year generated. beginning after December 31, 2017 to 80% • May be carried back two years. of taxable income. • May be carried forward 20 years. • Eliminates carrybacks. • Allows unused NOLs to be carried forward indefinitely. Limitation on Losses from Trades or Businesses: Limitation on Losses from Trades or Businesses: • Passive losses are limited to passive income. • Disallows excess business losses attributable • Active trade or business losses limited to tax to trades or businesses of the taxpayer, over basis in the activity. a threshold amount ($500,000 for married taxpayers filing jointly; $250,000 for all other taxpayers (indexed for inflation)). www. lslcpas .com
Like Kind Exchanges Pre ‐ Reform 2017 Reform Act Like ‐ Kind Exchanges: Like ‐ Kind Exchanges: • • No gain or loss is recognized to the extent The Act limits the nonrecognition of gain that property held for productive use in or loss to like ‐ kind exchanges of real the taxpayer's trade or business, or property that is not held primarily for sale. property held for investment purposes, is exchanged for property of a like ‐ kind that also is held for productive use in a trade or business or for investment. Property can be real or personal property. www. lslcpas .com
Accounting Methods Pre ‐ Reform 2017 Reform Act Cash Method of Accounting: Cash Method of Accounting: • Taxpayers with average gross receipts of • Corporations and partnerships with less than $25 million (indexed for inflation) corporate partners are prohibited from for the prior three taxable years are using the cash method of accounting permitted to use the cash method of unless they meet an average gross accounting, regardless of entity structure receipts of less than $5 million for the or industry. prior three taxable years. • Qualified personal service corporations are generally permitted to use the cash method regardless of gross receipts. www. lslcpas .com
Accounting Methods Pre ‐ Reform 2017 Reform Act Accounting for Inventories: Accounting for Inventories: • Businesses where the production, • Taxpayers with average gross receipts of purchase, or sale of merchandise is a less than $25 million (indexed for inflation) material income ‐ producing factor must for the prior three taxable years are account for inventories and must also use exempt from the requirement to account the accrual method of accounting. for inventories under §471, regardless of entity structure or industry. • Taxpayers with average gross receipts of • Taxpayers may either treat inventories as less than $10 million for the prior three materials and supplies that are not taxable years may account for inventory incidental or conform to financial as non ‐ incidental materials and supplies. accounting treatment. www. lslcpas .com
Accounting Methods Pre ‐ Reform 2017 Reform Act Unicap Rules: Unicap Rules: • Businesses must either include in • Taxpayers with average gross receipts of inventory or capitalize certain direct and less than $25 million (indexed for inflation) indirect costs related to real or tangible for the prior three tax years are exempt property, whether manufactured or from the UNICAP rules, regardless of acquired for resale. entity structure or industry. • Businesses with less than $10 million in average gross receipts are exempt from this requirement with respect to personal property acquired for resale. www. lslcpas .com
Accounting Methods Pre ‐ Reform 2017 Reform Act Percentage of Completion Requirement: Percentage of Completion Requirement: • Contractors with average annual gross • Effective for contracts entered into after receipts of $10 million or less for the Dec. 31, 2017, the act amended §460 to three prior taxable years are classified as allow taxpayers with average annual gross “small contractors” and are exempt from receipts of $25 million (indexed for the requirement to use the percentage ‐ inflation) or less for the prior three ‐ of ‐ completion method of accounting for taxable ‐ year period an exemption from long ‐ term construction contracts to be the requirement to use the percentage ‐ of ‐ completed within two years, and may completion accounting method for long ‐ instead use the completed contract term construction contracts to be method or other applicable methods. completed within two years, regardless of entity structure www. lslcpas .com
Qualified Business Income Deduction There is nothing to fear… www. lslcpas .com
Qualified Business Income Deduction Pre ‐ Reform 2017 Reform Act • • Businesses organized as sole proprietorships, Taxpayers who have domestic “ qualified partnerships, limited liability companies and S business income ” (QBI) from a partnership, S corporations are generally treated as pass ‐ corporation, or sole proprietorship are entitled through entities subject to tax at the individual to a deduction of the lesser of 20% of QBI or owner or shareholder level rather than the 20% of taxable income . The deduction reduces entity level. taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize. www. lslcpas .com
Qualified Business Income Deduction Qualified Business Income: • The term “qualified business income” means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. (Section 199A(c)) • Excludes investment income such as short term capital gains/losses, long term capital gains/losses, dividends, interest etc. (Section 199(A)(c)(3)) www. lslcpas .com
Qualified Business Income Deduction Qualified Trade or Business: • The term “qualified trade or business” means any trade or business other than a specified service trade or business , or the trade or business of performing services as an employee. (Section 199A(d)(1)) www. lslcpas .com
Qualified Business Income Deduction Specified Service Trade or Business: • Section 199A(d)(2) refers to section 1202(e)(3)(A) (exceptions for engineering and architecture) • Section 1202(e)(3)(A) any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees www. lslcpas .com
Qualified Business Income Deduction Limitations: • The deduction is generally limited to the greater of either: a) 50% of the W-2 wages paid with respect to the qualified trade or business, or b) the sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property . www. lslcpas .com
Qualified Business Income Deduction Qualified Property: • Defined as tangible property of a character subject to depreciation 1. That is held by, and available for use in, the qualified trade or business at the end of the tax year 2. That is used in the production of QBI, and 3. For which the depreciable period has not ended before the end of the tax year • Depreciable period is the period beginning on the date the property is first placed in service by the taxpayer and ending on the later of 1. The date 10 years after that date, or 2. The last day of the last full year in the applicable recovery period that would apply to the property www. lslcpas .com
Qualified Business Income Deduction Exception to Limitation: • Exception to the W-2 and depreciable property limitations applies to a taxpayer with taxable income not exceeding $157,500 ($315,000 in the case of a joint return). These limitations are fully phased in for a taxpayer with taxable income in excess of the threshold amount plus $50,000 ($100,000 in the case of a joint return). • Exception also applies to specified service businesses. www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Definition of Trade or Business (Prop. Regulation 1.199A-1) – Must rise to the level of a section 162 trade or business other than the trade or business of performing services as an employee (NOT VERY HELPFUL!) www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Aggregation Rules (Prop. Regulation 1.199A-4) – Allows commonly controlled businesses to aggregate activity for purposes of applying the limitations described in Proposed Regulation 1.199A-1(d)(2)(iv) (i.e. wage and/or UBIA limitation). • Available if – 50% or more common ownership – Must satisfy two of three factors: » Trades or businesses provide products that are similar » Trades or businesses share facilities or centralized business elements (i.e. accounting, legal, manufacturing, purchasing etc.) » Trades or businesses operate in coordination or reliance upon one another. www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • De minimis rule (Prop Regulation 1.199A-5) – Allows businesses to conduct a small amount of services in an SSTB • Available if – the business has gross receipts of $25 million or less in a tax year and less than 10% of gross receipts from SSTB activities, or – the business has gross receipts greater than $25 million in a tax year and less than 5% of gross receipts from SSTB activities www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Health (Prop Regulation 1.199A-5): – Definition provided - the provision of medical services by individuals such as physicians, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists and other similar healthcare professionals. • Does not include the operation of health clubs or health spas that provide physical exercise or conditioning to their customers, payment processing, or the research, testing, and manufacture and/or sales of pharmaceuticals or medical devices. www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Consulting (Prop Regulation 1.199A-5): – Definition provided - The provision of professional advice and counsel to clients to assist the client in achieving goals and solving problems – Facts and circumstances determination – If a “trade or business provides ancillary consulting services that are not separately purchased or billed, then such trades or businesses are not in a trade or business in the field of consulting.” www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Athletics (Prop Regulation 1.199A-5): – “The performances of services by individuals who participate in athletic competition such as athletes, coaches, and team managers in sports such as baseball, basketball, football, soccer, hockey, martial arts, boxing, bowling, tennis, golf, skiing, snowboarding, track and field, billiards, and racing” – Does not include services that do not require unique skills such as the maintenance and operation of equipment or facilities used in athletics or the broadcast or other dissemination of video or audio to the public www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Financial Services (Prop Regulation 1.199A-5): – includes managing wealth, advising clients with respect to finances, developing retirement plans, developing wealth transition plans, the provision of advisory and other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings and raising financial capital by underwriting, or acting as the client’s agent in the issuance of securities, and similar services – “includes services provided by financial advisors, investment bankers, wealth planners, and retirement advisors and other similar professionals, but does not include taking deposits or making loans ” www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Brokerage Services (Prop Regulation 1.199A-5): – “services in which a person arranges transactions between a buyer and a seller with respect to securities for a commission or fee” – “includes services provided by stock brokers and other similar professionals, but does not include services provided by real estate agents and brokers, or insurance agents and brokers ” www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Investing and investment management (Prop Regulation 1.199A-5): – “a trade or business that earns fees for investment, asset management services, or investment management services including providing advice with respect to buying and selling investments;” – “include(s) a trade or business that receives either a commission, a flat fee, or an investment management fee calculated as a percentage of assets under management;” – “ does not include directly managing real property .” www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Reputation or skill (Prop Regulation 1.199A-5): – “(1) receiving income for endorsing products or services, including an individual’s distributive share of income or distributions from an RPE for which the individual provides endorsement services; – (2) licensing or receiving income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity, including an individual’s distributive share of income or distributions from an RPE to which an individual contributes the rights to use the individual’s image; or – (3) receiving appearance fees or income (including fees or income to reality performers performing as themselves on television, social media, or other forums, radio, television, and other media hosts, and video game players).” www. lslcpas .com
Section 199A Proposed Regulations Additional Guidance on Specified Service Trade or Business: • Rental Real Estate: – Each rental must rise to the level of a section 162(a) trade or business (Prop Regulation 1.199A-1) – No aggregation rules provided like those in section 469 regulations for real estate professionals – Wide open for interpretation • Some believe that anything above a triple net lease would qualify • Some believe that taxpayers must materially participate in each individual rental property • Determined in future guidance or through future case law www. lslcpas .com
QUESTIONS? www. lslcpas .com
THANK YOU! Contact information: Jon Huckabay, MST, CPA, Partner 1611 E. Fourth Street, Suite 200 Santa Ana, CA 92701 714.569.1000 jon.huckabay@lslcpas.com www.lslcpas.com www. lslcpas .com
Retirement Plans – Options for Small Businesses Michael Agresti, MST, CPA Partner, LSL CPAs
Michael Agresti, CPA- Partner • 20 years of Accounting Experience • Masters of Science Taxation – Cal State, Fullerton (CSF) • B.A. in Business Administration – Accounting, CSF • Clients: – entrepreneurs / professionals / manufacturers / high net-worth individuals • Married with children … love to camp • And … Major League Baseball www. lslcpas .com
SEP IRA • Typically used for self employed individuals and entities with the owner as the main employee • Maximum limit on individual contribution or benefit is 25% of compensation or $55,000 for 2018 • Plan needs to be set up by the business tax filing deadline, including extensions • Contributions can be made for the prior year, up to the business tax filing deadline, including extensions www. lslcpas .com
Solo 401K • Designed specifically for self-employed individuals • Works similar to a regular 401K, but because funding can come from personal compensation and business income, annual contributions can be significantly higher • Max employee contribution for 2018 is $18,500, while those 50 or older can contribute $24,500 • Additionally, you can contribute up to 25% of your self- employment income, up to a max of $55,000 or $61,000 for individuals 50 or older www. lslcpas .com
Defined Benefit Plan • Often times are used as an add on to an existing company safe harbor 401K plan • Max limit on participant contribution is lesser of 100% of compensation of the three highest consecutive years or $220,000 benefit per year • Contribution deadline is the business’s tax-filing deadline, including extensions • Must be set up prior to business’s year end www. lslcpas .com
Charitable Giving Options Michael Agresti, MST, CPA Partner, LSL CPAs
Charitable Contributions • The TCJA increased the AGI limit from 50% to 60% for charitable contributions • Applies to contributions made after December 31, 2017 and before January 1, 2026 • Any excess contributions may be carried forward for 5 years www. lslcpas .com
Gift IRA fund to charities • A qualified charitable distribution (QCD) give individuals at least 70 ½ years old the ability to exclude from gross income from IRA’s of up to $100,000 per year • Must make sure that the IRA-to-charity transfer goes directly from the IRA to the charity in order for it to be excluded from AGI • The distribution isn’t subject to the general percentage limitations that apply for making charitable contributions www. lslcpas .com
Donor Advised Funds • A charitable giving vehicle wherein an individual or family makes an irrevocable, tax deductible contribution of personal assets to a charity and at any time thereafter can recommend grant distributions to qualified charitable organizations • A less expensive and hassle free alternative to starting a private foundation www. lslcpas .com
Bitcoin & Cyber Currency Mark R. Zimmerman, JD, MRED, CPA Director, LSL CPAs
Mark R. Zimmerman, JD, MRED, CPA - Director • 30+ years of Accounting Experience • Juris Doctor/Master of Real Estate Development - USC • Bachelor of Arts in Business Administration – CSUF • California Native and Self-appointed Family “Geek” www. lslcpas .com
Bitcoin & Cyber Currency • What is it? • How is it taxed? • Why does it matter to you? www. lslcpas .com
The Short Answers: What is it? A digital medium of exchange How is it taxed? As property - Not as currency Why does it matter to you? The underlying technology will be disruptive . www. lslcpas .com
What are Cyber Currencies? • Bitcoin was the first. (Satoshi Nakamoto, 2008) • Token v. Protocol • Looks like money. Smells like money… • Key differences: – Not a fiat currency. (Snowden: “No men with guns.”) – Decentralization – Limited supply (21 million) – Pseudonymity – Immutability – Divisibility (100,000,000 satoshi = 1.0 Bitcoin) www. lslcpas .com
Bonus question: So, how does that work? • Asymmetric encryption • Blockchain • Miners and new block bonus (mining consortiums) • Transaction fees • Proof of Work vs. Proof of State • Wallets, exchanges (Coinbase, Kraken), and marketplaces www. lslcpas .com
How is it taxed? • IRS Notice 2014-21 states that Bitcoin is property, not currency. • Treated as a capital asset. Normal capital gain/loss rules. • Subject to NIIT. • Miners have ordinary income subject to SE tax. • After TCJA, no Section 1031 treatment. • Not a security. So, no 1099-B. • 1099-K currently has a high threshold. Expect it to drop. • The IRS has successfully pursued exchange records in court. (Coinbase, November 2017) www. lslcpas .com
How is it taxed? Page 2 • If your private keys are owned by a foreign exchange, then you must report a foreign account. (Forms 114 and 8938.) • Since Bitcoins are property, every transaction is really two: a taxable sale or purchase of Bitcoins; and, the underlying transaction itself. • Consider specialized software: Bitcoin.Tax or CoinTracking.Info. • The IRS requires contemporaneous specific identification for property transactions. The AICPA would prefer FIFO. Consider HIFO or LOFO as your situation requires. • Coin payments may be subject to withholding in actual dollars. www. lslcpas .com
Bonus #2: Why did the IRS get interested? • 1,700% growth in 11 ½ months during 2017. • Prior to 2017, only about 800 returns per year reported Bitcoin gains. • On behalf of the IRS, a private company, Chainanalysis, has already identified about 25% of all Bitcoin owners. www. lslcpas .com
Bonus #3: Volatility from ccn.com www. lslcpas .com
From coindesk.com: www. lslcpas .com
Why does it matter to you? • All digital currencies will continue to be volatile in the near-term and there will always be existential risk. • Being first doesn’t mean Bitcoin will be around forever. • Bitcoin uses a lot of energy. • Blockchain will be adopted by the financial industry. • Blockchain will be applied where security or proof of authenticity is desired. The cost will be privacy. www. lslcpas .com
Wrapping up • Bitcoin is an inherently volatile digital medium of exchange. – Bitcoin was $15,317 on 1/1/2018. – Bitcoin is under $4,000 today. • Cyber currencies avoid some regulations and legacy costs. • However, they add complexity and their own costs. • And, if you know a gamer, now is finally the time to buy a new graphics card. www. lslcpas .com
Questions? www. lslcpas .com
Year End Tax Planning David Myers, CPA Partner, LSL CPAs
David S. Myers, CPA, MST - Partner • 30+ years Public Accounting Experience • Masters of Science Taxation – Golden Gate University • Industry specialization – Auto Dealerships, Manufacturing, Real Estate, Service • Married to Wonderful Wife Darlene • Deacon at Church • Love to Travel and Camp in My 1972 Vintage Trailer www. lslcpas .com
Planning Ideas • Itemized Deductions – “Bunching” – Charitable deductions – Employee business expenses – Vacation rentals and second homes • Real Estate & Depreciation – Cost segregation – Qualified Improvement Property – Bonus depreciation – Interplay with business interest limitation www. lslcpas .com
Planning Ideas, continued • Section 199A – Qualified Business Income Deduction – SSTBs with significant non-service component – Using aggregation elections – Rental real estate qualification – “Solo S Corps” maximizing deduction – Partnerships and guaranteed payments – Entity Selection • Estate Planning – Emphasis on income tax planning www. lslcpas .com
Itemized Deductions Strategies • Large standard deduction and elimination and capping of many deductions highlights the need to “bunch” – Example: SALT $10,000; Mortgage interest $10,000 and charity of $5,000 for MFJ couple – year 1 and year 2. Result is $25,000 itemized deductions for each year. If charitable contribution is bunched into year 2 ($10,000), then year 1 is standard deduction of $24K and year 2 is $30K. Total for two years is $54K instead of $50K. • Charity is typically the one controllable deduction as to timing – so use it as the “on/off” faucet www. lslcpas .com
Itemized Deduction Strategies, cont. • Leverage charitable contribution bunching by using donor advised funds • Contribute appreciated property to avoid capital gain • Use Qualified Charitable Distributions – contributing up to $100K annually of minimum distribution from an IRA • No reason to accelerate income or real estate tax deduction unless below $10K limit • Consider turning 2 nd home into rental – all taxes and interest used to acquire are deductible www. lslcpas .com
Itemized Deduction Strategies, cont. • Employee business expenses are no longer deductible. Outside sales people who own their own car just took a pay cut. Consider adopting an accountable plan and reimbursing for their expenses. Also consider owning the vehicle – can result in large deductions with minimal income for personal use to employee. Adjust compensation plans accordingly www. lslcpas .com
Real Estate & Depreciation • Consider cost segregation on any new purchase of real estate to be rented or used in a business. Bonus depreciation rules now leverage this tactic • Does Qualified Improvement Property (QIP) qualify for bonus? Right now no – but almost assuredly yes. • Like kind exchange on personal property is gone but with bonus depreciation result is better • Business interest deduction limitation on real estate – elect out but no bonus depreciation on QIP www. lslcpas .com
Section 199A – Qualified Business Income Deduction • Specified Service Trades and Businesses (“SSTBs”) cannot utilize the deduction (unless below income limits) • Accountants, attorneys, stock brokers, health care professionals, consultants • Example: Dermatologist – 60% income from treatment fees and 40% from product sales. Need to establish new entity? Since 40% is above 10% - then it won’t be considered SSTB income. Proper accounting is key! www. lslcpas .com
Section 199A – QBI Deduction, cont. • Use of aggregation elections to group related businesses- 50% common control and 2 of 3 integration factors are met. – Provide products and services that are the same or are customarily provided together – Share facilities or significant business elements – Interdependence, i.e. supply chain • SSTBs cannot be aggregated. www. lslcpas .com
Section 199A – QBI Deduction, cont. • Example of aggregation: – TB-A - $1 million QBI $500K wages – TB-B - $1 million QBI $0 wages – TB-C - $10K QBI $500K wages – Without aggregation • TB-A $200K fully deductible • TB-B $200K – but $0 deductible • TB-C $2K – fully deductible • Total tentative199A deduction = $202K www. lslcpas .com
Section 199A – QBI Deduction, cont. • Example, cont. – With aggregation • TB-A to C $402K QBI $1,000K wages • Tentative QBI deduction = $402K – $402K vs $202K – use aggregation if available • Does rental real estate qualify? – Spectrum – Triple Net Lease – definitely not – but 40 properties in which taxpayer makes all decisions, etc. – definitely will – Goal: move from left to right on that spectrum as far as you can – i.e. at lease change from triple net lease to double net lease www. lslcpas .com
Section 199A – QBI Deduction, cont. • “Solo S Corporations” with QBI – To maximize deduction need to pay yourself wages unless aggregating with another business that pays wages – The “magic” percentage is 28.57% (2/7ths) of income to pay in wages – Example $1 million before wages; wages of 28.57% = $285,700; QBI after wages = $714,300; 20% of QBI = $142,860 which is ½ of wages • Guaranteed Payments of partnerships aren’t QBI – Consider restructuring partnership agreement to be “line 1” www. lslcpas .com
Section 199A – QBI Deduction, cont. • Entity selection – High income businesses with large payrolls – S corporations are advantageous; Partnerships OK with large enough “non-owner” payroll. – High or low income businesses with no payrolls – Sole proprietorships – Selection should always consider non-tax factors www. lslcpas .com
Estate Planning Ideas • With $11.2 million exemption – concern for most estates shifts from estate tax planning to income tax planning • You may want step-up on second spouse to die i.e. all assets included in estate of second to die • What if you already have bypass trust set up? – Consider reforming or decanting existing trust – New CA law for decanting to make it easier • If no trust set-up – consider utilizing portability and/or qualified disclaimers on first-to-die – but still use a trust! www. lslcpas .com
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