TAX SEMINAR - Smith Schafer

TAX SEMINARJill Eggerichs Rock, CPA, JD

Smith Schafer & Associates, Ltd. 1

TOPICS FOR DISCUSSION


1. C. Corp Specific Changes: AMT, Rates, NOL2. 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: Wayfair5. Individual Tax Changes: AMT, Rates, Business

Losses, Itemized Deductions6. Opportunity Zones7. MN State Impact

C CORP SPECIFIC CHANGES


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• AMT = REPEALED• Rate = 21%• NOL = Limited to 80% of taxable income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?

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 DeductibleEntertainment for employees or as part of employee party

100% 100%

Meals offered to the public

100% 100%

Meals for employer convenience

100% 50%

Office coffee/soda/snacks

100% 50%

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

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.

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.

DEPRECIATION


• Luxury Auto limitsNo Bonus: Year 1: 10,100, Year 2: 16,100, Year 3: 9,700, Year 4+: 5,760With 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)


• Only Real Property Qualifies• Update to MN 5/30/19: now conforms to federal

treatment of this

LIKE KIND EXCHANGES

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

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

ACCOUNTING METHODS


• Cash Method• Accounting for Inventories• Unicap• Accounting for Long Term Contracts

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!

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

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.

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.

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.

INDIVIDUAL INCOME TAX

TAX RATES – 7 INDIVIDUAL BRACKETS


Rate Single Married HOH MFS10% $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

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

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

ESTATE, GIFT, AND GST TAXES


2018 2019Federal exemption $11.18M $11.4MMN exemption $2.4M $2.7M

Minnesota extends to $3M for 2020 and later

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

ALTERNATIVE MINIMUM TAX (AMT)


Individual AMT remains in place but with amounts increased:

• Exemption amounts: $71,700 for single filers / $111,700 for joint filers

• Phase-out thresholds: $1,020,600 (joint) and $510,300 (other filers)

• Increased exemption and phase-out threshold amounts apply 2018-2025

PERSONAL EXEMPTIONS AND CHILD TAX CREDIT


• Personal Exemptions = Eliminated

• Child Tax Credit – increase to $2,000 ($500 for qualifying dependents otherthan qualifying children).

• Qualifying child under the age of 17 increased phase out for MAGI MFJ$400,000

ITEMIZED DEDUCTIONS


Standard deduction vs. more limited itemized deductions• Increased Standard Deductions

– 24,400 MFJ– 18,3500 HOH– 12,200 Single

• State and local itemized tax deductions limited to $10,000(includes state and local property tax, plus either state andlocal income tax or sales tax)

• Charitable donation deductions remain in place, increasinglimits for cash contributions to public charities from 50% to60% of AGI

ITEMIZED DEDUCTIONS


• For homes purchased between 2018 and 2025, the existing $1,000,000 limitation is reduced to $750,000

• No deduction for Home Equity Loans – except to extent of use on the home

• Medical expense deductions for expenses in excess of 7.5% of AGI (In 2019 the floor rises to 10%)

• Miscellaneous itemized deductions are eliminated

OTHER DEDUCTIONS


• Moving Expense Deduction– Both the exclusion for qualified moving expense

reimbursements and the deduction for moving expenses are suspended.

– Exception for members of the Armed Forces.

• Casualty and Theft Losses– No longer allowed except in federally-declared

disaster areas.

ALIMONY


• Divorce or separation agreement executed after December 31, 2018, or one executed before December 31, 2018 but modified after it (as long as the modification expressly provides that the new amendments apply), alimony and separate maintenance are not deductible by the payor and are not included in the income of the payee.

MN Update: MN now conforms as of 2019.

LOSS LIMITATION RULES


• Excess Business Loss– Aggregate gross income from trade/business less

aggregate deductions from trade/business of the taxpayer, if less than zero.

• Limited to $500,000 (MFJ) or $250,000 (all others)– Excess is carried forward as an NOL.

• NOL carryover limited to 80% of taxable income• No NOL carryback

OPPORTUNITY ZONES


• Economically-distressed community where new investments may be eligible for preferential tax treatment

• Two Parts– Temporary deferral of gain reinvested in opportunity zone

within 180 days (a portion may be permanently excluded depending on holding period requirements: 10% if held for 5 years; and 15 % if held for 7 years)

– Permanent exclusion of capital gains from the sale or exchange of the qualified opportunity fund if held for at least 10 years

• “Capital Gains” – includes recapture amounts

MINNESOTA

MINNESOTA


• Changed starting point for MN income from federal taxable to FAGI for tax years beginning after 12/31/18

• Conforms to increased standard deductions for individual and married individuals.– There is an income threshold for standard deduction

reduction starting at 194,650– Separate standard deduction for dependents– Additional deduction for taxpayers over 65 or blind– Continues charitable subtraction for nonitemizers for

contributions over $500

MINNESOTA


• Itemized deductions:– Taxes limited to the same amounts as federal– Conforms charitable contributions to federal– Conforms interest expense– Allows medical > 10% AGI (fed is back to 10%)– Allows unreimbursed employee business expense >

2% and miscellaneous deductions > 2% (departure from fed)

– Allows state deduction for casualty and theft (departure from fed)

MINNESOTA


• 199A will not apply for MN• Add-back 529 distributions for k-12 expenses to the

extent of earnings• Change in tax rates for 2nd bracket from 7.05 to 6.80• Establishes a state dependent exemption equal to

$4,250 in tax year 2019 (phase out under the same rules that were in place for federal exemptions). Indexed for inflation

MINNESOTA


• 529 subtraction• Student loan repayment• Interest and penalty letters

• Desk audits related to conformity are coming!!

TAX SEMINAR - Smith Schafer

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