Introduction to the Tax Cuts and Jobs Act: Overview of What the New Federal Tax Law Means for Your Business and You Jon Kurrle, VP of Federal Government Relations Kevin Kuhlman, Senior Director of Federal Government Relations

These slides are meant for informational purposes only. DISCLAIMER: These slides are meant for informational purposes only. They should not be relied upon as tax advice.

Individual tax changes Format Business tax changes Rates Accounting Deductions Credits Individual tax changes

Rates Accounting Deductions Credits Business Tax Changes Rates Accounting Deductions Credits

Business Rates – Corporations 2017 Over But not over Tax rate $0 $50,000 15% 50,000 75,000 25% 100,000 34% 335,000 39% 10,000,000 15,000,000 35% 18,333,333 38% …. 2018 ALL taxable income will be taxed at 21% C-corps Permanently consolidates graduated rate structure into one corporate rate – 21%

Business Rates – Passthroughs Passthrough tax rates S-corps, sole-proprietors, partnerships, LLCs (not organized as corporations) Maintains 7 personal marginal tax rates Creates new 20% passthrough deduction Section 199A “Between the line” deduction Section 199A – passthroughs may deduct 20% of qualified business income (QBI) from a partnership, S corporation, sole proprietorship, or LLC (not organized as a corporation) This deduction is in addition to the reductions in the individual rates detailed later in this presentation “Between the line” deduction – This deduction is also in addition to the deductions generally available to individual taxpayers, including itemized deductions or the standard deduction

Section 199A – 20% Passthrough Deduction Deduct 20% from Qualified Business Income Net Income All businesses up to $157,500 single / $315,000 joint Professional Service Corporation Limitation/Exclusion Limited over next $50,000 single / $100,000 joint Excluded over $207,500 single / $415,000 joint Large Passthrough Limitation Limited to 50% of total W2 wages in the business What is qualified business income (QBI)? QBI generally refers to taxable income, meaning the net amount of qualified items of income, gain, deduction, and loss with respect to the trade or business of a business owner For example, if in a taxable year, a qualified business has $100,000 of ordinary income from inventory sales and makes an expenditure of $25,000 that can be capitalized and amortized immediately, the qualified business income is $75,000 ($100,000-$25,000). This business would be able to deduct 20% or $15,000 from the QBI. QBI is determined for each qualified trade or business of the business owner QBI does not include any amount paid by an S corporation or a partnership that is treated as reasonable compensation for the business owner Who is eligible for the Section 199A deduction? All businesses, regardless of industry, are eligible for the full 20% deduction under Section 199A until they earn up to $157,000 single / $315,000 joint in taxable income Trusts are eligible for the 20% deduction The 20% deduction is phased out over the next $50,000 single / $100,000 joint of taxable income for professional service corporations Modified list of IRC Section 1202(e)(3)(A): “any trade of business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such a trade or business is the reputation or skill of 1 or more of its employees” Professional service corporations earning above $207,500 single / $415,000 joint are excluded from the 20% deduction Other passthrough businesses earning above the $207,500 single / $415,000 joint thresholds face a limitation of 50% of total W2 wages. Generally, businesses with more employees or higher total W2 levels enjoy the full 20% deduction while businesses with fewer employees or lower total W2 levels may have a more limited deduction.

Business Accounting Alternative Minimum Tax (AMT) Repeals corporate AMT Cash Accounting Expands from $5 m to $25 m Expensing / Depreciation Section 179 expensing doubles from $510,000 to $1 m 100% bonus depreciation of business property Cash accounting Expands the use of cash accounting to all businesses (including C corporations) with average annual gross receipts under $25 million for the three prior taxable years Also expands the universe of farming C corporations and farming partnerships that may use the cash method to the $25 million gross receipts test Expensing / Depreciation Increases the amount of property eligible for Section 179 expensing from $510,000 in business property in 2017 to $1 million of property beginning in 2018 Increases the phaseout threshold from $2.03 million in 2017 to $2.5 million in 2018 Expands eligibility to include furnishings for lodgings, new roofs, HVAC systems, and fire and security alarms for commercial buildings Increases “bonus depreciation” that allows 100% cost expensing for acquisitions of depreciable business property regardless of the amount of property

Business Accounting – Withholding Business owners Implement 2018 withholding tables ASAP Deadline February 15, 2018 Employees Not required to take extra steps Should review withholding to ensure accuracy IRS Revising Form W4; creating new W4 calculator (February) Anticipate further changes to withholding in 2019 Employees Particularly households with more than one income earners IRS Issued IRS Notice 1036 earlier this year

Business Deductions Creates Section 199A – 20% passthrough deduction Business State and local taxes (SALT) Business-related SALT (property and income) still fully deductible for corporations and passthroughs Schedules C, E, and F; Form K-1 Interest deductibility Below $25 m – fully deductible Above $25 m – limited to 30% EBITDA X GONE: entertainment deduction, transportation √ STAYS: business meals, home office

Business Credits Maintains most business credits Creates Paid Family and Medical Leave Credit Available for 2018 and 2019 Minimum 2 weeks of paid leave Minimum 50% of wage replacement (12.5% credit) to 100% (25% credit) Worked at least 1 year, earned $72,000 or less Requires separate, written family and medical leave policy

Individual Tax Changes Rates Accounting Deductions Credits

Maintains 7 personal marginal rates; broadens thresholds Individual Rates Maintains 7 personal marginal rates; broadens thresholds 2017 Rate Individual Joint 10% $9,325 $18,650 15% $37,950 $75,900 25% $91,900 $153,100 28% $191,650 $233,350 33% $416,700 35% $418,400 $470,700 39.6% > $418,400 > $470,700 2018 Rate Individual Joint 10% $9,525 $19,050 12% $38,700 $77,400 22% $82,500 $165,000 24% $157,500 $315,000 32% $200,000 $400,000 35% $500,000 $600,000 37% > $500,000 > $600,000 Combined with the Section 199A deduction, this creates a top effective tax rate of 29.6%, 10 percentage points lower than 2017

Individual Accounting Individual AMT Increases exemption threshold from $54,300 to $70,300 single / $84,500 to $109,400 joint Increases phaseout thresholds from $120,700 to $500,000 single / $160,900 to $1m joint Estate tax Doubles exemption threshold from $5m to $11m single / $11m to $22m joint Maintains stepped up basis Individual AMT As a practical matter, few taxpayers will pay the AMT – approximately 600,000 Americans

Individual Deductions Doubles standard deduction $6,350 to $12,000 single / $12,700 to $24,000 joint Limits Individual State and local taxes (SALT) Capped at $10,000 aggregate (property and income) Schedule A Lowers home mortgage interest deduction Existing mortgages grandfathered New mortgages capped at $750,000 aggregate Home equity loan deductibility repealed X GONE: Misc. itemization; alimony (2019); tax prep; moving √ STAYS: Charitable; retirement; medical expense lowered + NEW: AGI limitations on personal deductions (PEP/Pease)

Individual Credits Doubles child tax credit and expands eligibility $2,000 per child Phaseout begins at $200,000 single / $400,000 joint Repeals personal exemptions Individual mandate penalties eliminated beginning 2019 Penalties remain in 2017 and 2018

Questions? kevin.kuhlman@nfib.org