Association for Corporate Counsel Oh, Did Something Just Happen with Taxes? Wednesday, February 7, 2018 Myers Park Country Club 12:30-1:30 Warren P. Kean Shumaker, Loop & Kendrick wkean@slk-law.com

General Observations Tax Cuts and Jobs Act (Pub. L. 115-97) - Short title dropped in the end - “Reform” not part of short title; substantial “changes” made concerning Multinational tax (i) 8% (illiquid assets) and 15% (liquid assets) current tax on post-86 accumulated foreign earnings in CFCs. May elect to pay this tax over 8 years, recapture rule imposing 35% on certain inversions occurring before Dec. 23, 2027. Apple reported to pay $40 billion on this deemed repatriation. (ii) 100% deduction for foreign-source portion of dividends from “specified 10%-owned foreign corporations.” Territorial vs. Worldwide System. (iii) Retains requirements that US shareholders of a CFC include their share of the CFC’s undistributed foreign income and earnings that are deemed invested in US property. (iv) Repeals indirect foreign tax credit on CFC income.

GENERAL OBSERVATIONS (v) Special rules for deemed “base erosion) (a) BEAT – Minimum “Base Erosion Anti-Abuse Tax”: 5-10% minimum tax on certain deductible payments (e.g., interest, royalties, management fees and other “base erosion payments” those that are deductible or depreciable) to or acquired from, foreign affiliates. Imposed on corporations (inclusive of foreign affiliates ECI) with $500 million or more in gross receipts. (b) GILTI – “Global Intangible Low-Taxed Income” minimum tax on U.S. shareholders primarily with respect to royalties and other income earned on by CFC’s intellectual and other intangible assets. Effective 10.5% tax (taxable income less 50% deduction) on foreign earnings that exceed a standard rate of return, when less than 13.125% of foreign taxes are paid on the excess. (c) FDII - Effective tax of 13.125% on foreign-derived intangible income. (vi) Disqualified expenses paid in hybrid transactions or to hybrid entities. b) Life and other insurance companies and products c) Tax-exempt organizations

General Observations “Simplification” not part of short title, particularly for businesses. No tax return on a post card. Some simplification by doubling standard deduction, suspending miscellaneous itemized deductions, eliminating the corporate minimum tax, diminishing the applicability of the individual AMT, etc. Tax cuts CBO estimated the Act will increase the national debt by $1.455 trillion over 10 years $1.125 trillion of net benefits (tax cuts less reduced healthcare subsidies) to individuals and flow-through entities $320 billion of net benefits to corporations Maximum corporate rate reduced from 35% to 21% Maximum individual rate reduced from 39.6% to 37% Doubled the lifetime exclusion exempt from estate tax Jobs? Stay tune, JCT estimates modest increases in GDP and employment

CAVEAT Generally, will not discuss exceptions and limitations to the rules or the sunset, phase-in and phase-out provisions, or special rules for certain industries, businesses, and taxpayers. Generally will not discuss “permanent” vs. non-permanent changes.

INDIVIDUALS Give with one hand and take with another Giving 1. Increased standard deduction (get deduction regardless of manner in which taxpayers spend money) from $6,350 for individuals and $12,700 for joint returns to $12,000 and $24,000. 2. Eliminated “Pease” cut back of 3% of AGI above the threshold amount of $300,000 for joint returns, indexed, up to 80% of itemized deductions. 3. Significantly reducing potential application of AMT.

INDIVIDUALS Taking 1. Eliminates personal exemptions. $4,050 for taxpayer, spouse and dependents and certain status cover 65 or blind), phasing out for married filing joint returns at $313,800 and $261,500 for individuals. 2. Eliminates ability of many to itemize: $10,000 limit for state and local income and property taxes (couples and individuals). $750,000 of “acquisition indebtedness” on (including for substantial improvements to) first and second homes (each). No deduction for interest on home equity lines (reform?) Suspends miscellaneous itemized deductions (those that must exceed 2% or more of AGI, including certain employee expenses).

INDIVIDUALS Tax Rate Reductions Taxable Income 2017 2018 Savings $100,000 $16,478 $13,879 $2,599 (=2.6%) 250,000 55,017 48,579 6,428 500,000 143,231 126,379 16,852 750,000 242,231 216,879 25,352 1,000,000 341,231 309,379 31,852 10,000,000 3,905,231 3,639,329 265,852 (=2.6%)

INDIVIDUALS No reduction in long-term capital gains rate. 20% for couples with taxable income over $479,000. (Passive income lose preference in tax reform). Likewise, no reduction in tax rate for qualified dividends. No reduction in the 3.8% NIIT.

INDIVIDUALS Eliminates the 80% deduction for seating rights at college athletic events. Effect on coachs’ salaries? Tax reform?

INDIVIDUALS No deduction for business entertainment (including amusement and recreational expenses), or − membership in business, recreation and social clubs − on premises athletic facilities Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).

EMPLOYEE BENEFITS Employee achievement awards: No longer can give cash, cash equivalents, stock, bonds, gift coupons, vacations, meals, lodging or tickets for the theater or sporting events as “employee achievement awards” that were deductible by the employer but not included in the employee’s income. Removal of performance–based exception to denying deduction on compensation paid to covered employees of publicly-held companies. New 12.5% tax credit for employers providing paid family and medical leave Terminates favorable tax treatment of moving expenses, regardless of who pays.

CORPORATIONS Single, 21% corporate income tax rate. Favorable accounting rules (cash method, inventory, unicap) for corporations with average gross receipts of $25 million or less (up from $5 million).

FLOW THROUGH ENTITIES (PARTNERSHIPS AND S CORPORATIONS) 20% deduction for non C corporation owners on qualified business (non- investment) income, or 37% x 80% = 29.6% maximum effective rate. If lower (a) 50% of W-2 wages, or (b) 25% of W-2 wages plus 2.5% of the acquisition basis of qualified property (depreciable tangible property). Not applicable to certain professional service businesses (involving healthcare, accounting, legal, sports, performing arts, consulting, brokerage services, financial services) below the low threshold of $315,000 - $415,000 for married filing joint.

OTHER BUSINESS AND M&A PROVISIONS Temporary 100% expensing of (bonus depreciation) of qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. Qualified Property: Depreciable tangible property other than buildings (those with depreciable lives of 20 years or less) and some building improvements. Acquirer need not be the “original user.” Sec. 179 expensing of business property expanded to $1 million if the total amount of all such property placed in service during the year is less than $2.5 million at which point the deduction begins to be phased out. Type of property that may be expanded to include certain improvements on commercial real estate: roofs, HVAC systems, fire protection and security systems.

LIMITATIONS ON INTEREST DEDUCTIONS 1. Limited to 30% of EBITDA (2018-2021) and EBIT (2022 and later years) with excess interest deductions being carried forward. Does not apply to businesses with average gross receipts of less than $25 million. Does not apply to certain real estate businesses that elect to depreciate their buildings under ADS over 30/40 years.

REVOKING S ELECTION TO BECOME C CORPORATION BEFORE END OF 2019 If have the same ownership or revocation date as tax law’s effective date, may bet an additional 2 years (from 4 to 6) to spread out the additional taxes to be paid for changing from S status to C status.

REPEAL OF SECTION 199 DOMESTIC MANUFACTURING DEDUCTION.

CARRIED INTERESTS Carried interests awarded to individuals in investment funds and other partnerships in the business of raising or returning capital and investing, developing or disposing of investment assets (e.g., stock, securities, and real estate) for the benefit of third-party investors, must now be held for more than 3 years for long-term capital gain treatment.

CONCLUSION Full employment of tax accountants act. Companies tax departments will need to scrub all aspects of their organization, manner of conducting businesses, and employee and executive compensation and benefits to determine how they may be impacted by the new tax law. Companies will need to keep applicable provisions of the tax act in mind when engaging in M&A and other transactions. Ongoing monitoring will be needed to make sure the new law is a net win and not a net loss. Breath and scope of changes. Very long list of changes made. Taxpayers will not know the full impact of the new law without running proformas of how their operations will be taxed for 2018 and later years. Expect more changes in the future. Nothing is “permanent.”