2018 Tax Update Tax Cut and Jobs Act Justin Freeman, CPA and Patty Peaslee, CPA, CCIFP November 13, 2018 BBSC, Certified Public Accountants

Justin Freeman Justin joined BBSC in 2015, and has been in public accounting for greater than ten years. He earned his BS in Accounting in 2008 and his MS in Accounting in 2009, both from the University of Maine. Justin is a tax manager at BBSC, specializing in a variety of industries, including: real estate development, not-for-profit corporations, retail companies, and service providers. He advises on and prepares returns for partnerships, corporations, individuals, and non-profit organizations. He currently serves as treasurer for Camp Capella and the Ronald McDonald House Charities of Maine, and serves on the board of Amicus in Bangor. 2018 Tax Update Tax Cut and Jobs Act

Patty Peaslee Patty has been with BBSC since 2012. She specializes in construction accounting, providing clients with financial reporting services, tax planning and return preparation, and construction industry specific consulting. She has expertise in individual and corporate tax, as well as compiled, reviewed, and audited financial statement preparation across a wide range of industries. Patty earned her BS in Accounting with a minor in business administration from Strayer University and her MBA with a concentration in accounting from the University of Maine. She is treasurer of the Maine chapter of CFMA and serves on their membership committee. Additionally, she is a member of Associated Builders and Contractors of Maine, and is the current treasurer of the Brewer Economic Development Corporation. 2018 Tax Update Tax Cut and Jobs Act

Agenda Tax Cut and Jobs Act Discussion Time Corporate tax Pass-through income General business changes Individual tax Discussion Time Today we’ll go over the major changes taking place for the 2018 tax year as a result of the Tax Cut and Jobs Act. We’ll discuss some general changes affecting all businesses, as well as the specific changes relating to corporations, pass-through entities, and individuals. We’ll try to leave time at the end for questions and general discussion, but feel free to ask questions as we go. 2018 Tax Update Tax Cut and Jobs Act

Tax Cut and Jobs Act OMG! Signed into law on December 22, 2017 Tax year beginning 1/1/18 Early adjustments Bonus Depreciation – 9/27/17 2025 Sunset …mostly Talking points: OMG is this complicated. Complexity of the new legislation, biggest change in the tax code since 1986 Will need guidance on a lot of this from the IRS Will affect everyone in the room Big changes for contractors Most of these changes are temporary as of now, and are set to sunset after 2025 2018 Tax Update Tax Cut and Jobs Act

21% Corporate Tax Rate Permanent(ish) change New Corporate Rate: Corporate Rate was: $0 - $50,000 15% $50,001 – $75,000 25% $75,001 - $100,000 34% $100,001 – $335,000 39% $335,001 - $10,000,000 34% $10,000,001 - $15,000,000 35% $15,000,001 - $18,333,333 38% $18,333,334 and over 35% New Corporate Rate: 21% Talking points: Flat tax rate is great for profitable C-corps, lousy for those making less than $50K Change entity? It really depends, should discuss with tax advisor. Tax rate is potentially lower, but double taxation does still exist. If you never take anything out of the business, and your individual rate is higher than 21%, then…maybe. If you take cash out with any regularity, then you’ll be paying tax at the corporate level and the individual level, likely greater than the 21%. Definitely not a “slam dunk”. 2018 Tax Update Tax Cut and Jobs Act

Corporate Tax Corporate AMT is gone Blended rate for fiscal year corporations. Effect on Financial Statements Calculation of tax provisions Deferred tax assets/liabilities remeasured 2018 Tax Update Tax Cut and Jobs Act

Pass-through Income – Section 199A Income taxed at individual level – No change Not taxed at flat 21% Qualified Business Income Deduction (QBID) Lesser of 20% of QBI or 20% of taxable income less capital gains Subject to certain limitations Ridiculously complex calculation Maximum business tax of 29.6% Talking points: S-corps, partnerships, and sole-props still taxed at individual level, NOT subject to the 21% tax rate Calculation is very complex – still waiting on guidance from the IRS for practical application Deduction is limited to 50% of related W-3 wages. However, if you have a real estate holding company without wages, you will be allowed the deduction, limited to the original basis of property plus 2.5% 2018 Tax Update Tax Cut and Jobs Act

Qualified Business Income “The net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” - IRS Only items included in taxable income Excludes: Capital gains and losses Certain dividends Interest income Talking points: Deduction taken at individual level, you will not see it on your 1065 or 1120S, but instead on your 1040. Below the line deduction taken from taxable income, so it won’t affect SE tax. Certain additional limitations will phase in based on individual taxable income. Again – very complex 2018 Tax Update Tax Cut and Jobs Act

Qualified Trade or Business Any business except: Specified service trade or business IF taxable income is greater than $315,000 MFJ Deduction phased out at $415,000 MFJ Applies to related party activities (i.e. self rental) Employee wages Specified service trade or business includes: fields of health, law, accounting, actuaries, performing arts, consulting, athletics, financial services, investing and investment management, trading, etc. 2018 Tax Update Tax Cut and Jobs Act

Section 199A Limitations If taxable income is greater than $315,000 MFJ, deduction is limited to the greater of: 50% of W-3 wages 25% of W-3 wages plus 2.5% of unadjusted cost basis of property, plant, and equipment 2018 Tax Update Tax Cut and Jobs Act

Depreciation Section 179 Bonus Depreciation Maine $1 million deduction $2.5 million threshold Expanded definition of qualified property Bonus Depreciation 100% for all property acquired after 9/27/18 New and used property Maine Talking points: Section 179 increased to $1M with a $2.5M threshold. The definition of property qualified for 179 has also been expanded to include certain improvements made to nonresidential real property, including any improvements made to the interior of a business that is not attributable to the enlargement of the building or the internal structural framework. Qualified property now includes items such as roofs and HVAC. Bonus is 100% for all property acquired after 9/27/18 and now can be taken on both new and used property Bonus change is temporary, only through 2022 as of right now. Maine is conforming to Section 179 but decoupling from Bonus, but allowing the Maine Capital Investment Credit on assets for which bonus depreciation was taken. 2018 Tax Update Tax Cut and Jobs Act

Small Contractor Threshold Small Contractor: Increased from $10m average annual receipts to $25m. Not required to use the percentage-of-completion method of accounting. Exempt from look-back* 263A threshold increased Home-builders Talking points: POC, c2c still required for contracts lasting longer than 2 years. Just because you can do something doesn’t mean you should, discuss with your tax advisor. Look-back still applies for AMT purposes and contracts lasting longer than 2 years If you aren’t using the POC method and are therefore subject to 263A uniform capitalization rules (homebuilders?), that threshold has increased as well with the new legislation. 2018 Tax Update Tax Cut and Jobs Act

Net Operating Losses Carried forward only, indefinitely Only able to reduce 80% of taxable income in any given year. Only applies to losses generated in 2018 and beyond. Talking points: No more carrying NOLs back to the preceding two years and getting a check in the mail No more completely wiping out next year’s income 2018 Tax Update Tax Cut and Jobs Act

Interest Expense Limitations 30% of adjusted taxable income Carried forward Small taxpayers exempt from limitation Limited at taxpayer level Talking Points: Amount of interest deductible will be limited to 30% of adjusted taxable income, with remaining interest carried forward indefinitely. This only applies to taxpayers with greater than $25M in average annual receipts. Limitation will be at the 1040 level. 2018 Tax Update Tax Cut and Jobs Act

Additional Business Changes Domestic Production Activity Deduction (DPAD) is gone. Like-kind exchanges for real property only Entertainment expense no longer deductible Talking points: The 9% DPAD is gone. For those of you that were claiming 100% of income as qualified for this deduction, you’re losing this 9%, gaining a 20%... Going forward, you will recognize gains and losses on vehicles traded in for new ones, instead of that amount being buried in the basis of the new asset. Entertainment expenses will no longer be deductible, even at 50%. 2018 Tax Update Tax Cut and Jobs Act

Qualified Opportunity Zones Sweet Potential gain deferral Potential gain exclusion Investment in 32 low income communities designated by the State of Maine Like Kind Exchange “on Steroids” 2018 Tax Update Tax Cut and Jobs Act

Individual Tax Rate MFJ was: $0 - $18,650 10% $18,651 – $75,900 15% $75,901 - $153,100 25% $153,101 – $233,350 28% $223,351 - $416,700 33% $416,701 - $470,000 35% $470,001 and over 39.6% New MFJ rate: $0 - $19,050 10% $19,051 – $77,400 12% $77,401 - $165,000 22% $165,001 – $315,000 24% $315,001 - $400,000 32% $400,001 - $600,000 35% $600,001 and over 37% Talking points: Brackets have expanded Most marginal rates have been lowered Top rate at 37% 2018 Tax Update Tax Cut and Jobs Act

Itemized Deductions Standard deduction increased to $24,000 MFJ Deductible taxes Limited to $10,000 Deductible Interest Mortgage acquisition debt reduced to $750,000 on new mortgages. HELOC interest is non-deductible Talking points: 70%-94% of taxpayers will now use the standard deduction instead of itemizing For those that do itemize, taxes are now limited to $10,000 2018 Tax Update Tax Cut and Jobs Act

Itemized Deductions Deductible medical expenses 10% threshold reduced to 7.5% 2% Miscellaneous deductions – gone Unreimbursed employee business expenses Investment expenses Legal fees Hobby expenses Tax Preparation 2018 Tax Update Tax Cut and Jobs Act

Additional Items for Individuals Alimony – not included for new divorces Personal exemptions – gone Child tax credit increased from $1,000 to $2,000 per child, with up to $1,400 refundable Affordable care act Individual mandate eliminated, penalty is gone in 2019 Talking points: Alimony not included in income or expenses for all new divorces No more personal exemptions No more Obamacare penalties AMT exemption and phase-out amounts increased. For the most part, very very few individuals are likely to be subject to AMT going forward. 2018 Tax Update Tax Cut and Jobs Act

Additional Items for Individuals AMT exemption and phase-out amounts increased Almost non-existent Kiddie tax Taxed at rates applicable to trusts and estates Moving expenses Only for members of the armed forces Reimbursements included in income 2018 Tax Update Tax Cut and Jobs Act

So much change! Overwhelming amount of change Majority of taxpayers will see tax savings Guidance still needed Talking points: Lots and lots of changes, and potential. Talk to your accountant. At the end of the day, there should be savings We are still waiting on guidance from the IRS on a lot of this 2018 Tax Update Tax Cut and Jobs Act

Thank You! Questions?