1. Tax Reform ‘Red Button’ Issues
Creating a Safe Path Forward
Leon C. LaBrecque, JD, CPA, CFP®, CFA
LJPR Financial Advisors

2. Tax Cuts and Jobs Act: Tectonic Shift
Profound changes to business taxes
C-corp. rules changed
Pass-though rules changed (massively)
Small business changes
Depreciation changes
Interest changes
Loss deductions (NOL and Excess Losses) changed
Relevant remaining credits are R&D and low-income housing credit
Territorial tax
Deemed repatriation of accumulated foreign earnings
Individual taxes changed
Std. deduction increased
Itemized deductions limited
Child credit increased
Personal exemptions eliminated
AMT greatly reduced
Estate and gift changed
Estate and gift exemption amount doubled to $11.2M
Step-up basis retained
4/5/2019

3. Issues for CPAs CPA Economic 199A Outcome Business Planning Planning
Clients
Prospects
Ethical Duty
Fees
Economic
Outcome
199A
Business
Planning
Planning
4/5/2019

4. Issues for CPAs Clients Prospects Communicating new rules
Coordinating teams
CPA
Lawyer(s)
Other advisors
Economics versus planning
Prospects
Competitive advantage
Industry-specific RE Ag
Service
Mfg
Integrating Tax changes to planning
4/5/2019

5. Rate shift
Pre-TCJA, the corporate rate could be as high as 50.47% for shareholders (Corp/double tax dividends, UIIT)
Pass-through max rate was 43.4%
TCJA, maximum corporate is 39.8%
QSB (21% + 0%)?
CFC?
PHC?
Max pass-through is now 29.6% %
4/5/2019

6. Maximum Federal Tax Rates by Entity
Entity Choice Rates
Maximum Federal Tax Rates by Entity
Type of Entity
Prior
TCJA
C- Corp shareholder
50.47%
39.8%
Active pass-through owner, no QBI deduction
39.6%
37.0%
Passive pass-though owner with no QBI deduction
43.4%
40.8%
Active pass-through owner with QBI deduction
N/A
29.6%
Passive pass-through owner with QBI
33.4%
4/5/2019

7. 1202 (QSBS)
Qualified Small Business Stock (QSBS) acquired after 09/27/2010, may be eligible for 100% exclusion on capital gains.
Exclusion is greater of $10,000,000 or ten times the basis in the stock.
Makes earnings-retained companies who can sell equity very attractive.
4/5/2019

8. Business Taxes: C-Corps
Giant change: rate is now flat 21%
Personal Service Corporations (C-corps) are taxed at the 21% flat rate!
Qualified small business (QSB) stock eligible for capital gain exclusion
100% exclusion
Non-service business (except engineers and architects)
$10M gain limit
QUESTIONS TO ASK:
Should I change my pass-through to a C-corp?
Is my service business over $315K(mfj) or $157.5K (all other) of income?
Can I use the QSB exemption?
Will I retain earnings in my trade or business?
4/5/2019

9. More C-Corp
CFC now taxed at 21%, may warrant using ancient tax break from the 60s.
CIT (MI) adds back bonus depreciation, Pass-through does not (no CIT).
Losses trapped at entity level in C
C- corps unlimited SALT
Pass-throughs flow through SALT and limited
International operations favor C corps because of deduction for foreign derived intangible income
4/5/2019

10. Don’t Ignore C-corp. opportunities: Jump to changing entity
Accumulation
QSB
CFC
Jump to changing entity
Ignore C change is permanent
4/5/2019

11. Business Taxes: Pass-Through
Definition: All trade or businesses not C-corp:
S-Corp
Partnerships (LLC taxed as partnership)
Sole proprietorship
Trusts
Estates
REITs
MLPs
Entity-by-entity evaluation: each pass-though is separate
Basic idea is that there is a 20% deduction for pass-through income
Service business exception
W-2 exception (50% of W-2 wages)
Property exception (2.5% of unadjusted basis + 25% of W-2 wages)
Income ‘exception to the exceptions’ on taxable income lower than $315k (mfj) or $157.5k (all others)
4/5/2019

12. Don’t Crack entities under the new regs.
CPA firm owns building, spins it into separate LLC
80%/50% test
4/5/2019

13. Pass-Through Income Exceptions
W-2 rules, property basis rule or service business rules do not apply.
Married filing Joint: $315,000 of taxable income (24% bracket)
Married filing separately: $157,500
Single: $157,500
Child (including a kiddie tax child): $157,500
Non-grantor completed gift trust: $157,500
Non-grantor incomplete gift trust: $157,500
Estates: $157,500
4/5/2019

14. C versus Pass-through? Accumulate earnings, sell stock later C-corp.?
Have losses, use pass-through?
Under $157.5/$315, service business, use LLC/partnership?
Over $157.5/$315, non service business, use Sub-S?
Over $157.5/$315. service business, use C-corp?
Split businesses lines?
4/5/2019

15. Don’t ‘Crack’ entities under the new regs.
Don’t ignore de minimum rules ($25M/10%).
4/5/2019

16. Pass-Through: The ‘Poor RIA’:
Gail is a single RIA, self-employed, earns net income from her practice of $150,000
Her taxable income is about $128,000
She gets a deduction of 20% of her taxable income, or $25,600
Being in a service business doesn’t matter, since she has income under $157,500
4/5/2019

17. Pass-Through: The ‘Rich RIA’:
Gail, from our previous example, gets a nice case on December 12, 2018 and her income goes up by $80,000, to $230,000
Her taxable income is about $208,000
She loses her deduction and is in a higher bracket
She made more than $207,500
Her bracket went way up (from 19.2%)
She can get the deduction back by:
Possibly using a 401(k) plan and employer contribution, she could put $55,000 ($61,000 if she’s over age 50).
She could make a charitable donation to her charity or to a donor advised fund.
Making the plan deduction saves her taxes on the deduction ($17,600) plus a QBI deduction of $27,724.
Bracket shifts from 32% through the level and down to 19.2%.
4/5/2019

18. Pass-Through: Real Estate Tycoon
You can get a QBI deduction on real estate if you have basis in the property (not fully depreciated)
2.5% of the unadjusted basis is limit
Example: Scrooge owns a property he bought in 2008 worth $5M. It generates about $400k of rental income
He will get a deduction for $80,000, since 20% of income is more than 2.5% of $5M
4/5/2019

19. Don’t
Ignore the new regs impose the (very) ugly standard of §162 to the definition of ‘trade or business’
4/5/2019

20. Pass-Through: Splitting with Trusts
Suppose Scrooge owns some fully depreciated property worth $5M that generates $500K of income
No pass-through deduction, since it is fully depreciated
He sets up non-grantor trusts for each of his three nephews, spinning $100K each to them
They get pass-through, since the trusts get a $157,500 income exception
4/5/2019

21. Don’t
Use the same beneficiaries of multiple trusts or you run afoul of §678(e).
Different beneficiaries and different provisions of multiple trusts.
4/5/2019

22. Pass-Through: Bigger Non-Service
Waldo runs a successful travel agency as a Sub-S corporation
He nets $800,000 in income
He pays wages of $120,000
He would get the lesser of 20% of $800,000 ($160,000) or 50% of W-2 wages ($60,000), $60,000
He could increase his deduction by paying himself so that 50% of total salaries equal 20% of QBI. Adding $142,500 to wages would generate a $132,500 QBI deduction
4/5/2019

23. Don’t
Forget the 2/7 rule on W-2 for 199A.
4/5/2019

24. Pass-Through: Shifting Debt
Bill and Melinda have rental real estate. It has a basis of $2M, is not fully depreciated and has gross annual rent of $100,000 and interest on a $1.5M note of $75,000
Net is $25,000; QBI deduction is $5,000
If they can pay-off or refinance the debt, the QBI deduction goes up to $15,000
If they had bonds or cash, they could pay off the debt, save the $75,000 of interest (replacing the interest lost on the bonds) and garner a larger deduction.
If they used a pledged asset loan (or margin loan) with securities, they can still deduct the interest as investment interest.
4/5/2019

25. Pass-Through Planning Issues
Am I subject to the pass-through rules? (Not C-Corp.)
Am I subject to the service company rules?
Am I subject to the W-2 rules?
Is my income under the threshold?
Should I do something about my income?
We’re married and one of us has a pass-through. Are we better off filing separately?
Should we split off businesses to take better advantage of the new rules?
Should we split ownership to other members of our family or to trusts?
4/5/2019

26. Don’t Ignore the new rules on SSTB.
Especially the narrow catch-all on skill of one or more owners or employees.
4/5/2019

27. QBI Deduction Planning
QBI is individual, not entity
Wages not included in QBI
Guaranteed payment not included in QBI
Interest, dividends and cap gains not include in QBI (generally)
QBI on per pass-through, not combined
QBI losses carry over to QBI in subsequent years
QBI allowed for AMT calc.
Weird farm co-op rule
OBSERVATION:
Entity selection will be critical
Wages to owner or spouse relevant
Gray service businesses
401(k) now Roth makes sense?
Non-qualified deferred comp to reduce income?
Cash balance plans?
Full expensing to knock income down to levels?
Biz code important?
Depreciation schedules?
4/5/2019

28. Don’t Ignore Roth 401(k) if income is below the limit.
Ignore the usefulness of using deductions to TI if income over the limits:
Charity
401(k)
HAS
4/5/2019

29. More Business Changes Under $25 million 3-year average gross revenue:
Cash basis
No debt restrictions
Inventory
Completed contract
Full expensing of non-real estate
Net operating losses: no carryback, limited carry-forward
New excess loss limitation
Entertainment deduction eliminated
Car depreciation changed:
Under 6,000 pound GVW
Over 6,000 pound GVW
Interest deduction limited
4/5/2019

30. Don’t Forget NOLs are not fully deductible.
Ignore the Excess Loss Limitations.
Forget to consider the interface of the 199A and full expensing deductions.
4/5/2019

31. Tax Cuts and Jobs Act Individuals: Taxable Income Seven brackets
Std. deduction $12,200/$24,400
>65 or blind: add’l $1,300 or $1,600
Personal exemptions eliminated
Child credit increased
AMT limits increased
Itemized deductions
Medical > 7½% AGI
SALT up to $10,000/$5,000
PEASE repealed
Misc. itemized repealed
Charity AGI limit increased
Mortgage int. modified
529 expanded
Taxable Income
Rate
Single
Married
10%
$0 - $9,525
$0 - $19,050
12%
$9,526-$38,700
$19,051-$77,400
22%
$38,701-$82,500
$77,401-$165,000
24%
$82,501-$157,500
$165,001-$315,000
32%
$157,501-$200,000
$315,001-$400,000
35%
$200,001-$500,000
$400,001-$600,000
37%
$500,000+
$600,000+
4/5/2019

32. Itemized Deductions Mortgage Interest:
Pre-12/16/17 mortgages are grandfathered
Refinancing of grandfathered mortgages is grandfathered
No deduction for equity loan interest
New mortgage interest on first and second residence mortgages are deducible up to a combined $750,000
Medical: 7½% of AGI for 2017 and 2018
SALT: $10,000/$5,000
PEASE eliminated
OBSERVATION:
Interest still deductible
Medical ‘bunching’ in 2018 makes sense
SALT ‘bunching’ with charity
Elimination of PEASE may help big charitable donations
4/5/2019

33. Don’t Forget to gather all your ‘bunches’ together.
Forget SALT can be used by other entities, like Trusts or kids.
Forget to check all 2018 clients for proximity to std deduction.
4/5/2019

34. More Individual Changes
Child credit increases to $2,000 with $1,400 refundable
Phase out at $110,000 (single) or $400,000 (married)
Capital gain exclusion on principal residence retained
§529 expanded to K-12 private and religious schools
Charity now limited to 60% of AGI instead of 50%
Moving expenses gone
OBSERVATION:
Child credit better for lower income bracket than deduction
§529 allows tax-free savings for K-12 and higher ed., replaces Coverdell
New standard deduction rules suggest ‘bunching’ charity over alternating years, or using Donor Advised Fund
CRT and CLT’s may be more prevalent
4/5/2019

35. AMT
Retained but exemption amount increased to $109,400 (married) and $70,300 single
2015: 91,450 returns w/AMT filed in Michigan
Mostly dead now
OBSERVATION:
SALT (65.75% of preferences)
Personal exemptions (22.28% of preferences)
Misc. Itemized changes cautions (10.11% of preferences)
NOL (3.23% of preferences)
4/5/2019

36. Don’t
Automatically assume a client in AMT in 2017 will still be in AMT.
4/5/2019

37. Alimony Changed
No deduction for alimony paid but alimony received not taxable
Effective for divorces or modifications after 2018
4/5/2019

38. Tax Cuts and Jobs Act Estate, gift and generation- skipping taxes:
Exemption doubled, sunsets after 2025
$11.2M lifetime exemption in 2018 (indexed for inflation annually)
Step-up basis remains
Excise tax on private university endowments
Excise tax on Non-profit executive salaries above $1M
4/5/2019

39. Don’t Ignore estate taxes on client that may get over the $11M.
Forget there are several elections between now and 2025.
Allow wealth client to take adventure trips or have ’special drinks’ around the end of 2025.
4/5/2019

40. Child and Family Credit
Old rule: $1,000 credit per child under 17; phased out at $75K (S) and $110K (MFJ)
New rule: $2,000 for child (refundable up to $1,400), $500 for non-child dependents (including taxpayers’ and others) (not refundable)
New phase out starts: $200K(S, HOH, MFS) & $400K (MFJ)
Earned income credit retained
4/5/2019

41. Don’t
Forget this is good for younger kids, but the 17+ now have no personal exemption.
File single for college kids?
4/5/2019

42. Estate, Gift and GST Taxes
Doubles exclusion amount for estate, gift and generation-skipping taxes
Increased exclusion sunsets after 2025
Step-up in basis on death remains
OBSERVATION:
Many more people not subject to estate tax
Managing step-up may become more important
Splitting strategies for income, particularly QBI, becomes relevant
OBSERVATION:
Many more people not subject to estate tax.
Managing step-up may become more important.
Splitting strategies for income, particularly QBI, becomes relevant.
4/5/2019

43. Don’t
Forget that there is now an interface on 199A and Estate planning with incomplete Non-Grantor trusts.
Fail to review estate planning.
4/5/2019

44. More Stuff Muni Bonds: Unrelated Business Income Tax:
House bill would have made interest on new Private Activity Bonds (PABs), new advance refunding bonds and new bonds issued for professional sports stadium taxable
Final bill: all still tax-exempt
Unrelated Business Income Tax:
House bill would have made broad changes to definition and application of UBIT
Final bill: Tax-exempts with more than one source of UBIT (i.e. more than one unrelated business) must calculate income/losses for each separately and can’t combine (net) income/losses to calculate UBIT
Private foundation excise tax streamlined to 1.4%
Private college and universities excise tax of 1.4% on investment income:
More than 500 students
Assets over $500,000 per student
State college and universities not subject to provision
Endowments: Harvard $34.5B, Princeton $22.15B. U of M paltry $10.9B
Stock Options restricted stock or RSU in privately traded stock may defer recognition of income for up to 5 years (new 11/06)
4/5/2019

45. Disclaimer
This presentation and these materials are provided for informational and educational purposes based upon publically available information from sources believed to be reliable. This presentation and these materials are provided with the understanding that the author/presenter is not engaged in rendering legal, accounting, or other professional services, and it is not intended to provide any basis for legal, accounting, or other professional services.
Due to the constantly changing nature of the subject, this outline should not be used as a resource for any tax or accounting opinion, or tax return position.
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
COPYRIGHT ©2018, LJPR Financial Advisors

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©2018, LJPR Financial Advisors