Tax Cuts & Jobs Act

The Act: Page 8

Comparison of tax savings

(Uses 2018 Old/New Rates before credits) S2/2

Married Joint-Taxable Income Old 2018 Tax New 2018Tax

19,050 $ 1,905 $ 1,905
38,700 $ 4,853 $ 4,263
50,000 $ 6,548 $ 5,619
75,000 $ 10,298 $ 8,619
100,000 $ 16,308 $ 13,879
150,000 $ 28,808 $ 24,879
200,000 $ 42,623 $ 36,579
300,000 $ 73,726 $ 60,579
500,000 $142,144 $126,379

Copyright 2018 Jennings 17
Advisory Group LLC

The Act: Page 9-10

Rates & Brackets – S1/3

• Inflation calculation will now be “chained” CPI
– Previously used “Urban” CPI

• Difference is a more accurate but slower change
in CPI

• Standard Deduction Doubles to $24,000 MFJ,
$12,000 Single

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Advisory Group LLC

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The Act: Page 9-10

Rates & Brackets – S2/3

• Personal exemption ($4,150) eliminated

• Replaced with:
– Doubling of standard deduction
– Doubling of child credit <17
• Tripling of phase out
– New dependent credit of $500 (detail follows)

Copyright 2018 Jennings 19
Advisory Group LLC

The Act: Page 10

Rates & Brackets - S3/3

• Capital gains rates unchanged
– Modified to match new brackets
– Qualified dividends still taxed at LTCG rates
– Discussion to follow

• New preparer penalty of $500 per occurrance for
failure to do “due diligence” on Head of
Household

– New guidance will have to come from IRS on
what this means

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Advisory Group LLC

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The Act: Page 11
Rates & Brackets S 1/3

• Children with unearned income

– No more kiddie tax!! ITS GONE!
– Taxed at trust & estate rates (Note: cap gains 20%

threshold at $12,501 of income!) (only unearned inc.)
– Note: 1st $$ of income taxed (Regs HAVE to be coming)

Income Rate

$0-$2,550 10% of taxable income

$2,551- $9,150 $255 + 24% >$2,550

$9,151 $1,839 + 35% > $9,150

$12,501+ $3,011.50 + 37% > $12,500

Copyright 2018 Jennings 21
Advisory Group LLC

The Act: Page 11

Rates & Brackets – S2/3

• Children with unearned income

– Many, many more filers! Charge for these returns
– Estimated payments required at >$1,000 of tax ($5,664

of unearned income)
– Earned income still taxed at single rates

Income Rate

$0-$2,550 10% of taxable income

$2,551- $9,150 $255 + 24% >$2,550

$9,151 $1,839 + 35% > $9,150

$12,501+ $3,011.50 + 37% > $12,500

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Advisory Group LLC

151

The Act: Page 11

Rates & Brackets – S3/3

• New withholding tables in February, 2018

• Marriage penalty essentially eliminated for 95% of
Americans

• Head of Household benefit reduced above 22%
bracket

• Doubling of standard deduction means fewer
itemizers (30% of taxpayers itemized in 2016)

Copyright 2018 Jennings 23
Advisory Group LLC

The new Kiddie Savings Account
The Coverdell ESA – S 1/2 Page 12

• Attainable goal instead of 529 for average
taxpayers

• Non-deductible $2,000 annual contribution limit per kid
(not per contributor!)

• No tax on earnings while in account
• Deposits must stop when kid hits age 18
• Allows as qualified expenses all pre-college costs

including kindergarten and private school
• Withdrawals for education, including earnings, are tax-free
• May use 529 plan deposits in same year

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Advisory Group LLC

152

The new Kiddie Savings Account
The Coverdell ESA – S 2/2 Page 12

• Qualified schools-nearly all
• Qualified costs:

– Tuition, fees, books, supplies
– Room & board if at least ½ time enrollment
– K-12 add computers & internet costs!

• May change to other family member
• Withdraw all by age 30
• Withdrawals use same rules

as for 529 withdrawals
• Tax & 10% penalty for non qualified withdrawals
• Counts against financial aid

Copyright 2018 Jennings 25
Advisory Group LLC

The Act: Page 13

Capital Gains Planning – S1/3

• Taxpayers in ordinary Federal bracket of 15% or
less are in the 0% capital gains bracket

– If Cap. Gains cause the income to exceed the
top of 15%, only excess Cap. Gains are taxed

Filing Status Top of 12% rate Standard Taxable income
Single bracket deduction before capital
(plus >65/blind) gains are taxed:
$38,700
$12,000 $50,700

Married-Joint $77,400 $24,000 $101,400

Head of $51,800 $18,000 $69,800

Household

Married-Separate $38,700 $12,000 $50,700

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Advisory Group LLC

153

The Act: Page 13

Capital Gains Planning –

S 2/3

• There are 8 capital gains rates in 2018 ranging

from 0% to 31.8% (surtax applies when taxpayer

is at $200,000/250,000 single/MFJ)

• Surtax may apply to 15% regular capital gains
based on level of income

• 20% capital gains rate will apply to 37% brackets

– >$500,000 single and head of household
– >$600,000 married joint
– >$12,500 trusts and dependent children

Copyright 2018 Jennings 27
Advisory Group LLC

The Act: Page 13

Capital Gains Planning –

S 3/3

• Planning worksheet to maximize 0% rate capital
gains income for taxpayers at top of 12% rate

• Modify for single taxpayers to $38,700 and 12,000

Client Name: Filing Status: MFJ 2018

Filing status: 12% tax rate bracket highest income $77,400
limit 24,000
Plus Filing status standard deduction

Plus Additional Itemized deductions

Subtotal: maximum 0% capital gains taxable income
limit
Less estimated taxable income

Equals amount of no-tax capital gains to recognize
this year

Copyright 2018 Jennings 28
Advisory Group LLC

154

The Act: Page 14

Child & Family Credits – S 1/2

• Old law credit child < 17 $1,000, fully refundable

• New law doubles to $2,000
– Only $1,400 refundable
– No credit in year reaching 17
– Must have social security number by due date

• New credit for dependents (other than kids) $500

– Not refundable

– Not available to taxpayer & spouseCopyright 2018 Jennin2g9s

Advisory Group LLC

The Act: Page 14

Child & Family Credits – S 2/2

• A bigger change is the phase-in thresholds
– Earned income to qualify is now $2,500
– Formerly $3,000

• Biggest change is increase in phaseout

– Old law phased out at $75,000/ $110,000
keeping most families from getting the credit

– New law triples phaseout to $200,000/$400,000
making most Americans qualify for credit

– 1 of the biggest changes of law! Copyright 2018 Jennin3g0s

Advisory Group LLC

155

The Act: Page 15
Child & Family Credits

• Qualified child:

– Son, daughter, step, foster, sister,
brother, stepsister, stepbrother, adopted

• As well as their children

• Must be claimed as dependent on
taxpayer’s return

• Child must not provide >50% of their own
support

Copyright 2018 Jennin3g1s
Advisory Group LLC

The Act: Page 16
Net Operating Loss-
Individuals

• Old rules required 2 year carryback, 20 year carryforward

– Could waive carryback with election

– 100% of NOL carried forward,

– Did not apply to self employment income

– Still in effect for 2017 losses

• New rules allow carryover ONLY Copyright 2018 Jennin3g2s
Advisory Group LLC
– For losses occurring in 2018 or later
– No need to “waive” carryback
– Still does not apply to SE income
– Special farm rules may still apply

156

The Act: Page 17
Alimony Changes

• Effective for divorces final AFTER 12/31/2018

– Or modified after that date if modification
expressly says the new rules apply

• Alimony paid no longer deductible

• Alimony received no longer taxable

– Does this ruin an IRA contribution?

• Agreements prior to 1/1/2019 grandfathered
as deductible/taxable

Copyright 2018 Jennin3g3s
Advisory Group LLC

Requirements for Alimony Pg 18-19

The BIG 7-Meet them and taxable if received, deductible if
paid and divorce before 1/1/2019

1) Payment in cash

2) Received by (or on behalf of) spouse

3) Received under divorce or written separation
agreement

4) Not alimony if agreement designates payment
as excludible from recipient’s gross income

5) “H” & “W” can’t live together (no joint return)

6) Alimony may not continue after recipient’s death

7) Recapture may be required if “excessive front-
loading”

• A payment for child support is not alimony!

State Court cannot change Federal 34
Law!

Copyright 2018 Jennings Advisory Group LLC

157

The Act: Page 21
Moving Expenses

• Effective for years after 12/31/2017

• No deduction allowed for moving

– All reimbursements are taxable

• Members of military receive an exception if
moving pursuant to military order and a PCS

Copyright 2018 Jennings 35
Advisory Group LLC

The Act: Page 24
Educator $250
Deduction

• Retained by New Law & inflation indexed

• K-12 teachers, instructors, counselors, principals
and aids qualify

• Must work at least 900 annual hours

• MFJ may each deduct $250 if both qualify

• Qualified expenses include books, supplies,
equipment, software, professional development
and other materials but do not include home
schooling costs

Copyright 2018 Jennin3g6s
Advisory Group LLC

158

The Act: Page 25

Itemized Deductions

Phaseout for high income repealed – S 1/2

The Issue: 2017 up to 80% of itemized phased out

Except for:
Casualty, Gambling, Investment interest & Medical

Married Joint Fully
Phased
Phaseout Begins at Out at
$313,800 AGI $436,300

AGI

Copyright 2018 Jennings 37
Advisory Group LLC

The Act: Page 25

Itemized Deductions – S 2/2

• The high income phase out has been “phased
out” (repealed) for 2018

• The phase out (as well as AMT!) in prior years
kept many high-income Americans from being
able to deduct taxes and mortgage interest-they
just don’t realize it!

• The lost deductions for taxes & mortgage interest

may not have an actual effect on higher income

Taxpayers! Copyright 2018 Jennin3g8s
Advisory Group LLC

159

The Act: Page 26
Medical Deductions

• Originally 2017 was supposed to see a 10% floor
for all Americans’ medical expense deduction

• This rule is the first of 3 that affect 2017 returns

• 2017 will now use a 7.5% floor for deductible
medical expenses

• This major change calls for a quick review! 39

Copyright 2018 Jennings
Advisory Group LLC

The Act Page 28 178

Income, Sales & Prop. Tax - S 1/3

• Effective starting with 2018 returns
• Income (or sales, if higher) and property tax are

still deductible, but
– Limited to $10,000 total deduction per year
– No foreign RE taxes may be deducted here

• Business related taxes (Sch. C/E/F) are still
deductible on relevant schedule

• Foreign income tax credit still allowed 40

Copyright 2018 Jennings Advisory Group LLC

160

The Act Page 28 178

Tax for 2018 Prepaid in 2017-S2/3

• State/local INCOME tax paid in 2017 for 2018 is
treated as paid for year imposed, or 2018.

– Thus prepayments in 2017 will be deducted in 2018
under the 2018 $10,000 limit

• IR 2017-210 (12/27/17) allows prepaid
PROPERTY tax to be deductible when paid if:

– Assessed in 2017, and
– Paid in 2017 (state must allow and accept payment)

Copyright 2018 Jennings Advisory Group LLC 41

The Act Page 28 178

Taxes-Planning – Slide 3/3

• Home Office Deduction, where qualified, will
move non-deductible property tax to deductible
on Schedule C (see below)

• Accountable expense plans for home offices by
W-2 employees should reimburse the
applicable percentage thus allowing an indirect
deduction on a portion of the tax

Copyright 2018 Jennings Advisory Group LLC 42

161

The Act Page 29 178

Taxes-Planning – Slide 1/3

• Property tax paid by individuals on closing
statements must be carefully allocated and
negotiated!

– Delinquent tax paid by buyer is added to property basis
(now a good thing!)

• State tax refunds received in 2018 will still be
taxable if received for taxes paid and deducted in a
prior year to the extent of any tax benefit.

• State of residence may be important for high
income since itemized no longer phase out and
AMT will not be an issue

Copyright 2018 Jennings Advisory Group LLC 43

The Act Page 29 178

Taxes-Section 266 Election S2/3

• Unimproved, non-income producing property

• Add property tax & interest to property basis
rather than deduct

• Annual, not permanent, election by extension
date

• Physical attachment to 1040 with specific

property & expense description, made by due

date of return

Copyright 2018 Jennings Advisory Group LLC 44

162

The Act Page 29 178

Taxes-Section 266 Elect. – S 3/3

• See Reg. 1.266-1(b)(i) which also allows
capitalization of related interest and costs

IRC Section 266 Election

Taxpayer: ____________________________ FEIN: ______________________

For tax year ---- the taxpayer hereby elects under Internal Revenue Code
Section 266 and related Regulations at 1.266-1 to capitalize rather than deduct
property tax paid during the year on the following property:

Property Description
Amount___________________________________________ __________
__________________________________________________ __________
__________________________________________________ __________

Copyright 2018 Jennings Advisory Group LLC 45

The Act Page 30 178

Taxes-Home Office – S 1/2

• Rules for W-2 employees; Schedule C/F;
partners with regular and exclusive use:

1. Principal place of business,
2. Place to meet or deal with clients in normal

course of business, or
3. Separate, non-attached structure, or
4. For storage of inventory/samples.

Copyright 2018 Jennings Advisory Group LLC 46

163

Business Use of Home

Who Else Can Use Home Office? – 30
S 2/2

• Medical professionals working in hospitals

• Salespeople working at customer’s offices

• Authors, writers and speakers researching or
working away from office

• Teachers working at schools

• Contractors working at job sites

• No benefit for employees unless used for
“convenience of employer” and reimbursed
under accountable plan

Copyright 2018 Jennings Advisory Group LLC 47

31

Shareholder Home Offices

• Utilize accountable plan

• Establish valid “convenience of employer”
conditions

• Reimburse allocable utilities, interest,
insurance, repairs, direct expenses, taxes

– Do not reimburse for depreciation
– Do not reimburse for mortgage principal

payments

164

Form 1065-Partner Expenses 32

• Unreimbursed expenses of partners
and members qualify for special
deduction if required personal
payment, valid business expense and
not reimbursable (TC Memo 2011-
289)

• Home office should qualify

• Deduct on Schedule E, Pg.2 as “UPE”

• Must have written policy-Page 33

Copyright 2018 Jennings Advisory Group LLC 49

Home Office Review

• IRC Sec 280A-Exclusive and regular use
• Does not have to be entire room-may be a

portion
• Multiple rooms may qualify
• Normal square footage test is exclusive use

square footage/total square footage
• Must be business use, not investment

• Employee deduction allowed if no other
space available and for employer
convenience

• Worksheet page 34

165

The Act Page 37 178

Mortgage Interest – Slide 1/2

• Loans after 12/31/2017-4 Rules

1. $750,000 acquisition debt limit on 2 homes
(total, not individually)

2. If refinanced after 12/15/17 but originally
loaned before 12/15/17 continue to use
$1,000,000 limit if closed by 4/1/18

3. Refinanced after 12/15/17 with more money
new limit applies to additional borrowings

4. Refinanced after 12/15/17 and extend term,
new limit applies to all borrowings

Copyright 2018 Jennings Advisory Group LLC 51

The Act Page 37 178

Mortgage Interest – Slide 2/2

• Loans originating before 12/15/17 continue to
use $1,000,000 limit

• Equity interest on ALL loans not deductible
after 12/31/2017

Copyright 2018 Jennings Advisory Group LLC 52

166

The Act Page 38 178

Mortgage Interest – Slide 1/2

• Example 1: Old $600k loan, 23 years left

1. Refinance with no money out and no term
extension all is still deductible

2. Refinance and take out $100,000 for non-
improvements then new borrowing’s interest is
non-deductible, but old balance still ok

3. Refinance and extend term, #2 applies because
balance <$750k

Copyright 2018 Jennings Advisory Group LLC 53

The Act Page 38 178

Mortgage Interest, S 2/2

• Example 2: Old $800k loan, 23 years left

1. Refinance with no money out and no term
extension full $800k grandfathers because loan
existed at 12/15/17.

2. Refinance and take out $100,000 for non-
improvements then new borrowing’s interest is
non-deductible, but old balance still ok

3. Refinance and extend term, only interest on the
first $750k will be deductible

Copyright 2018 Jennings Advisory Group LLC 54

167

The Act Page 39 178

Mortgage Interest – S 1/3

• In depth knowledge of mortgage rules is
mandatory & we will review

• All clients must be asked, starting immediately:
1. Did you refinance or draw on an equity line

this year?
2. When & How Much?
3. What was the money used for?

Copyright 2018 Jennings Advisory Group LLC 55

The 10T Election – P. 39
Slide 2 of 3

• If a Taxpayer borrows money on his
personal residence for business or
investment purposes; he/she can make an
election to trace the borrowing to the
activity it relates to and deduct the interest
against that activity.

Copyright 2018 Jennings 56
Advisory Group LLC

168

Tracing Interest – pg. 39 S 3/3

• Money borrowed against home is equity interest

• Normal tracing rule tracks the use of loan proceeds, not
the security for the loan-these rules do not apply when
borrowing against your personal residence

• Equity borrowing however looks at asset borrowed
against to determine deduction: equity by default

• If equity loan is used to improve-”acquisition debt”
• Equity debt is limited to interest on 1st $100,000 of

borrowing- AND No longer allowed after 12/31/17

• 10-T election allows taxpayer to follow tracing rather than
equity and deduct interest on appropriate business
schedule

• Physically attach to return in year of borrowing (Pg 39)

• Applies thereafter

• Annual election applicable to year of election’s borrowing
only

57

Copyright 2018 Jennings Advisory Group LLC

The Interest Deduction-All personal borrowings

Tracing or Equity – pg. 41 Equity Rules

Tracing Rules For Borrowing

Against Personal

Deduction based Residence

on Use of Funds Equity Debt for all

Acquisition Debt OR other amounts
with $0k Limit

with $750K limit if No deduction for

used to buy, build or interest

improve home

borrowed against 10-T Election

Applies Tracing

May Free UpCopyright 2018 Jennings Advisory Group LLC58

169

Our 2018 Mortgage Borrow $150k: $50
Interest Self Test for car, $100 for new
Assume no existing
debt & all borrowings bedroom
against personal Borrow $150k
home 1/2/18 unless against rental for
stated – page 42 personal home
improvements
A-Mortgage Interest
B-Investment Interest Borrow $150k to
C-Equity Interest buy vacation home
D-Schedule E
E-Not Deductible Borrow $150k to
buy ren5t9 al property
Copyright 2018 Jennings Advisory Group LLC

The Act Page 43 178

Casualty/ Theft Loss – S 1/2

• Effective for years beginning after 12/31/2017

• No personal casualty loss deductions unless in
Presidentially declared disaster area

Copyright 2018 Jennings Advisory Group LLC 60

170

The Act Page 43 178

Gambling Loss Ded. – S 2/2

• Effective for years beginning after 12/31/2017

• Gambling loss deductions are limited to
gambling winnings

– Expenses other than wagering are also limited such as travel,
supplies, forms, etc.

– Overturns Mayo case

Copyright 2018 Jennings Advisory Group LLC 61

The Act Page 44 178

Charity Deductions

• Effective for years beginning after 12/31/2017

• Cash contribution AGI limit now goes to 60%
from 50%

– Continue to use 60% for carryover years

• Deduction for payments for seating rights in
college athletic events eliminated

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171

The Act Page 45 178

2% Itemized Deduct. – S 1/2

• Effective for years beginning after 12/31/2017

• All 2% itemized deductions are gone including:

– Form 2106 & employee business expenses

– Investment advisory fees

– Tax preparation

– Hobby expenses

– Repayment of overpaid Social Security

• Gambling losses are not 2% itemized
items (never have been)

Copyright 2018 Jennings Advisory Group LLC 63

The Act Page 45-46 178

2% Itemized Deduct. – S 2/2

• Planning Ideas: 64
1. Accountable plans, particularly for

– Outside sales
– Traveling employees

2. IRA fees paid by IRA not individual
3. Allocate tax prep fees appropriately
4. Make hobbies into businesses
5. Atty fees on lawsuits-discrimination,

civil rights cases-go to front of 1040

Copyright 2018 Jennings Advisory Group LLC

172

The Act Page 47-48 178
ABLE Accounts

• Tax advantaged account for disabled-earnings
are not taxed if disabled before age 26

• Eligible if minimal assets and income

– Account does not affect Public Program
Benefits

• Maximum annual contribution $15,000

– May now be transferred from 529

• Contribution limit increased by earnings of
account beneficiary

– Which qualifies for the saver’s credit! 65

Copyright 2018 Jennings Advisory Group LLC

The Act Page 49 178
529 Accounts

• May now be used for high school and
elementary school

– $10,000 maximum annual withdrawal amount
per student

– Private, public or parochial school qualifies

– Some home school expenses now qualify
such as course materials, books, online
education materials, tuition outside of the
home and educational therapies.

Copyright 2018 Jennings Advisory Group LLC 66

173

50

529 Plans – Slide 1/2

• Congress designed “qualified tuition
program” or QTP

– May prepay tuition, or

– Save for tuition

• Established by states, schools, mutuals

• No deduction upon contribution

• No tax on earnings while in account

• Pay particular attention to state deductions
or credits http://www.savingforcollege.com/state_tax_529_calculator/

Copyright 2018 Jennings 67
Advisory Group LLC

50

529 Plans – Slide 2/2

• Qualified costs:

– Tuition & fees including high/elementary school
• $10,000 annual limit on costs before college

– Room & board (savings plans only)
– Books & supplies (savings plans only)
– Required equipment
– Computers (permanently reinstated 1/1/15)
– Software
– Services

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Advisory Group LLC

174

52

529 Plans

• Two types of plans (Many states offer state tax
credit):

– Prepaid Tuition

– College savings

• Not all providers offer both types

• $15,000 annual “no gift tax” limit

– This is not a limit on the deposit!

– Special 5 year rule available if gift tax return filed and
option is checked

• Earnings withdrawals not taxed if used for
qualified expenses

• Depositors with any income may contribute to

529 plan. Copyright 2018 Jennings 69

Advisory Group LLC

The Act- Student Page 57 178

Loan Debt Forgiveness – S 1/2

• COD because of borrower’s death or total and
permanent disability is now exempt after
12/31/2017

Copyright 2018 Jennings Advisory Group LLC 70

175

The Act Page 57 178

Insurance Mandate – S 2/2

• Individual mandate repealed after 12/31/2018

• Individuals must still have qualified health
insurance through the end of 2018 or face a
potential penalty. No penalty thereinafter!

– Some states are considering such a law

• This DID NOT CHANGE THE EMPLOYER MANDATE

– Applicable large employers with 50 or more full-
time plus full-time equivalent employees must
still offer qualified insurance or potentially pay a
penalty

Copyright 2018 Jennings Advisory Group LLC 71

The Act Page 58 178

Roth Recharacterization

• Years beginning after 12/31/2017 an IRA that
has been converted to a Roth may not be
“reconverted” back to the IRA

• 2017 recharacterizations may still be allowed
through 10/15/2018 because the conversion
occurred in a year beginning before 12/31/17

• Future Roth conversions must carefully 72
consider this negative factor

Copyright 2018 Jennings Advisory Group LLC

176

The Act Page 59 178
Odds & Ends

• Rollovers of qualified plan loans are now
extended from 60 days to the due date of the
return in the year the loan is disqualified as a
loan for years after 2017.

• The time to contest a wrongful levy has been
extended from 9 months to 2 years for levies
after 12/22/17

Copyright 2018 Jennings Advisory Group LLC 73

The Act Page 60-61 178

2016 Disaster Area Rules

• Up to $100,000 may be withdrawn from
qualified retirement plans from 1/1/16-1/1/18
without penalty if in 2016 Presidentially
declared disaster area

• Amounts are still taxable but receive a 3-year
income inclusion period or may be rolled over
tax-free during that time

Copyright 2018 Jennings Advisory Group LLC 74

177

The Act Page 62 178
Odds & Ends

• Rollovers of capital gains on the sale of
publicly held securities into a specialized small
business investment company (SSBIC) are
reduced for years after 12/31/17 as listed

• The sale of a patent is now ordinary income for
sales after 12/31/2017

Copyright 2018 Jennings Advisory Group LLC 75

The Act Page 63-64 178

Alternative Minimum Tax

• AMT Exemption increases per table
• AMT phaseout quadruples
• 2 of top 3 AMT causes now gone
• #1 cause of AMT is marginalized

• See example page 64

Copyright 2018 Jennings Advisory Group LLC 76

178

Estate & Gift Tax Changes Pg 69

o Estate, GSTT & gift tax exemption for decedents
dying after 12/31/2017 receive a basic exclusion
of $10 million before inflation or $11,200,000 after
inflation

o Any taxable amount is taxed at 40%

o Portability election still available - $22.4M on
second spouse to die if elected!!!!

o Step up basis rule remains in effect

o Watch state rules!

o Utilize increased amount for gifts now!

o See table page 70

Copyright 2018  Jennings Advisory Group LLC 77

Gift Tax – Pg.70

•Tax imposed on TAXABLE gifts

–A taxable gift is one which exceeds the
exclusion amounts

–It does not automatically mean tax is due

•6 exclusions available:

–$15,000 per grantee, per year in 2018 are
considered non-taxable gifts, the excess
amounts are taxable

–Unlimited spousal gifts (no gift tax return
required)

–Direct payments of education (more to follow)

–Direct payments of medical (more to follow)

–Charity

–Political

Copyright 2018  Jennings Advisory Group LLC 78

179

The Act Page 71 178

Accounting Methods – S 1/3

• Cash Method now allowed for all businesses
(other than tax shelters) with average revenues
<$25 million

• Average revenues are determined based on the
prior 3 years revenues (annualize short years)

• Controlled groups must aggregate receipts for
average test

• Inventory for resale must still be accounted for
as inventory and not deducted until sold

• Accrual is still allowed for any of these
companies of course

Copyright 2018 Jennings Advisory Group LLC 79

The Act Page 71 178

Accounting Methods – S 2/3

• Personal Service Corporations are allowed to
use cash method without limit by the $25
million average revenue test

• Service based other businesses allowed to use
cash method without limit by the $25 million
average revenue test unless “C” corporation

– Service business:

“Inventory is not a material income producing
factor”

Copyright 2018 Jennings Advisory Group LLC 80

180

The Act Page 71 178

Accounting Methods – S 3/3

• Sec. 263A inventory capitalization now no longer
required until revenues exceed $25 million, 3 year
average (UNICAP)

• Percentage of completion for long-term contracts now
uses the $25 million threshold.

• $25 million is now inflation adjusted after 2018

3 Prior Year Average Revenues Test for 2018

(2015+2016+2017)/3= if less than $25 million cash is
allowed

Copyright 2018 Jennings Advisory Group LLC 81

The Act Page 72 178

Accounting Methods – S 1/2

• Once the $25,000,000 test is exceeded taxpayer
must change to accrual

• Example page 72

• Taxpayer may change back to cash if they are
accrual if:
– <$25 million revenue test met, and
– Has not changed overall method in 5 years, and
– Not in final year of business

Copyright 2018 Jennings Advisory Group LLC 82

181

Changing Accounting Methods – S 2/2 Page 7225

• Form 3115 (See Rev. Proc. 2015-13)

– Automatic changes-if not under exam

• No fee and automatic approval
• No letter of acceptance sent to taxpayer
• Retroactive audit protection (unless in audit)
• Adjustment is called a 481(a) adjustment
• File with return
• Also file duplicate with IRS office no later than filing

of return
• File with amended return within 6 months of original

due date
• Cash/accrual changes automatic in limits

Copyright 2018 Jennings 83
Advisory Group LLC

The 481(a) Adjustment Page 73 26

• This is the net effect (positive plus negative
adjustments) to income

• If POSITIVE the taxpayer may
– Bring into income ratably and prospectively over the
next 4 years (Add to other income)
– Or elect, if $50,000 or less to include all in 1 year
– This may be a good year to change if income is down

• If NEGATOV the entire adjustment may be deducted in
full in year of change under Rev. Proc. 2015-13

• Changes are always made the 1st day of the year
• Make sure to use latest Form 3115

Copyright 2018 Jennings 84
Advisory Group LLC

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Page 74 40

The 481(a) Adjustment – S 1/2

• Accrual to cash also qualifies for the

automatic change (Use Code 32 or 33 until

they come up with a new one on Form

3115) .

– If changing for 2018, start by determining 12/31/17 year
end amounts reflected such as receivables and
payables that will not be reflected under cash method.

– On 1/1/18 Dr. Payable, Cr. Expenses

– On 1/1/18 Dr. Sales, Cr. Receivables

• The ACT requires a 6 year “adjustment period” if

terminating “S” election AND changing method

Copyright 2018 Jennings 85
Advisory Group LLC

The 481(a) Adjustment Example – S 2/2 40

Page 74

• On 1/1/2018
• Dr. Sales $100,000
• Cr. Accts Receivable $100,000

So we originally had $100,000 of revenues in
accounts receivable, which we now are allowed
to subtract, in full, in the year of change as a
“Negative 481A adjustment”.

Copyright 2018 Jennings 86
Advisory Group LLC

183

The Act Page 79
Section 179 – S 1/3
2

•Years beginning after 12/31/2017 use new
$1,000,000 limit, with $2,500,000 phase out

–Fiscal years continue with old $510k limit for 1 year

•Inflation indexed after 2018, including heavy SUV

Copyright 2018 Jennings 87
Advisory Group LLC

The Act Page 79
Section 179 – S 2/3
2

•Newly qualified for Sec. 179
–Tangible personal property in lodging facilities
(this would include rental property as well as
hotels)-a big change!;
–Roofs;
–HVAC;
–Fire protection systems;
–Alarm systems;
–Security systems.

Copyright 2018 Jennings 88
Advisory Group LLC

184

Section 179 – S 3/3 Page 79

• Purchase price qualifies

• Business use must equal or exceed 50%
– Recapture if drops to <50%

• Most 3,5,7 and 10 year life assets qualify,
plus

– Software

– Qualified improvement property

– Newly qualified under new law

Copyright © 2018 • May be preferable to bonus for small
business because of ability to control
Jennings Advisory the amount
Group, LLC
• Can amend a return to invoke or
revoke a IRC 179 election.

The Act Page 86

Bonus Depreciation – Slide 1/2 2

•Effective for property bought and placed in
service after 9/27/2017

•Now allowed for used property

•Now allowed 100% rate
–Phased down starting with 2023 purchases

•Additional bonus in excess of the new base is
still allowed for luxury vehicles

Copyright 2018 Jennings 90
Advisory Group LLC

185

The Act Page 86

Bonus Depreciation – S 2/2 2

• Now allowed for films, TV & theatre
productions based on initial release/live

•May elect 50% instead of 100% for 1st year
ending after 9/27/17 (or 2017 for most
taxpayers)

•Bonus depreciation generally applies to
3,5,7,10,15,20 year property.

Copyright 2018 Jennings 91
Advisory Group LLC

Bonus Depreciation  87-88

All assets in 3,5,7,10, 15 and 20 classes
– Also rental property furniture &
furnishings & appliances
– Remember parking lots & landscaping
– All farm assets
– Example 1 page 87 (LOOK AT THIS)

No maximums, phase-outs or income tests

Copyright 2018 Jennings Advisory 92
Group LLC

186

The Act Page 92
Luxury Vehicles
2

•Effective for property bought and placed in
service for years beginning after 12/31/2017

•New base bonus amount has been increased
per table, plus subsequent increases per pg.93

Copyright 2018 Jennings 93
Advisory Group LLC

The Act Page 95

Farm Property Lives & Methods 2

•Effective for property bought and placed in
service for years beginning after 12/31/2017

•Depreciable lives on qualified farm equipment
drops from 7 to 5 years

•Depreciation method changes to 200% for
assets in the 3,5,7 and 10 year life categories
bought after 12/31/2017

Copyright 2018 Jennings 94
Advisory Group LLC

187

The Act Page 96-97

Real Property Lives & Methods 2

•Starting in 2018, we will no longer have
qualified LI property, Restaurant Imp. Property
or retail improvement property.

•Qualified improvement property is now:

–Improvements to interior of nonresidential prop.

–Other than new

–Does not include elevators, escalators,

enlargements

–Requires straight line over 15 years

–Combines confusing, old 4 different definitions

•Qualifies for Sec. 179 and for bonus 95

Copyright 2018 Jennings
Advisory Group LLC

The Act Page 98

Other Depreciation Changes 2

•Effective for property bought and placed in
service for years beginning after 12/31/2017

•10 year farm property for farms with >$25
million in revenues must use ADS

•Citrus farmers may expense replanting costs
of trees lost in casualty in some cases

Copyright 2018 Jennings 96
Advisory Group LLC

188

The Act Page 99

C Corporation Tax Rates 2

•Effective for years beginning after 12/31/2017

•Flat tax rate of 21% for all C Corporations

–Including personal service corporations (PSC)

•A major reduction for all, particularly PSC

•See chart of rates

Copyright 2018 Jennings 97
Advisory Group LLC

The Act: Page 100
Net Operating Loss
C Corporations

• Old rules required 2 year carryback, 20 year carryforward

– Could waive carryback with election

– 100% of NOL carried forward

– Still in effect for 2017 losses

• New rules allow carryover ONLY

– For losses occurring in 2018 or later
– No need to “waive” carryback
– 80% of current year income annual deduction limit

Copyright 2018 Jennin9g8s
Advisory Group LLC

189

The Act: Page 101

Like Kind Exchanges – S 1/2

• Effective for exchanges completed after
12/31/2017

• Tax free exchange only allowed for real property
trades

• Personal property trades (like trucks, machinery)
will now be recorded as:

– Sale for trade-in value given

– Purchase of new asset for full price including
trade in credit with full bonus

Copyright 2018 Jennin9g9s
Advisory Group LLC

The Act: Page 101

Like Kind Exchanges – S 2/2

• Real estate flippers are in the business and the
homes do not count for 1031 treatment-they are
inventory (and never did count for tax-free
rollover)

• Depreciation schedules will start cleaning up!

Copyright 2018 Jenn1in0g0s
Advisory Group LLC

190

The Act: Page 102

Entertainment

Deduction – Slide 1 of 3

• Effective for years beginning after 12/31/2017

• Entertainment, amusement or recreation no
longer deductible, even at 50%

– Athletic events, shows and concerts

– Dues for clubs organized for the same

– Facilities used in connection with (like boxes)

– The old “directly related to business conducted
before, during and after” rule is no longer valid

• This would appear to apply to travel to such

events as well!

Copyright 2018 Jenn1in0g1s
Advisory Group LLC

The Act: Page 102

Entertainment

Deduction – Slide 2 of 3

• 50% Meal deduction still allowed on work travel

• 100% deduction still allowed if reimbursing for
costs which are then billed to another

Copyright 2018 Jenn1in0g2s
Advisory Group LLC

191

The Act: Page 102

Transportation Fringes – S 3/3

• Effective for years beginning after 12/31/2017

• Code Sec. 132 fringes now eliminated
1. Commuter highway vehicles
2. Transit passes
3. Qualified parking
4. Bicycles

Copyright 2018 Jenn1in0g3s
Advisory Group LLC

The Act: Page 103
Odds & Ends

• Effective for years beginning after 12/31/2017

• Code Sec. 199 DPAD (production deduction)
eliminated

• Employee achievement awards may not include
gift cards, coupons or certificates, or vacations,
meals, lodging, theatre tickets, etc.

• Partnership technical termination rule no longer

applies Copyright 2018 Jenn1in0g4s
Advisory Group LLC

192

The Act: Page 104
Odds & Ends

• Effective for years beginning after 12/31/2017

• Credits unchanged for the most part

• Repeals these credits:

– Clinical testing of drugs reduced to 25%

– Rehab credit repealed except for certified
historic structures

• New Family leave credit of 12.5% of wages

paid while on leave if wages are at least

50% of normal pay up to 12 weeks Jenn1in0g5s
Copyright 2018

Advisory Group LLC

The Act: Page 104-105
Odds & Ends

• Effective for years beginning after 12/31/2017
• C Corporation AMT repealed

• Interest deduction limited for businesses with
revenues >$25 million

• Sale of partnership interest that was received in
return for services results in short term capital
gain for 3 years

Copyright 2018 Jenn1in0g6s
Advisory Group LLC

193

The Act: Page 106
Odds & Ends

• Effective for amounts paid or incurred after
12/22/2017

– No deduction for settlement payments related to sexual
harassment if subject to non-disclosure

• Effective for transfers after 12/31/2017

– Asset basis will be adjusted for built in losses
>$250,000 upon transfer of partnership interest

Copyright 2018 Jenn1in0g7s
Advisory Group LLC

The Act: Page 107
Odds & Ends

• Effective for transfers after 12/31/2017

– Outside basis reductions apply at cost basis not FMV
when FMV>basis of noncash contributions

• Effective 1/1/2018

– ESBT allowed shareholders includes nonresident alien
individuals

• Effective 12/31/2017

– Allows 6 year adjustment period for S corporations

terminating back to C corporations while changing

accounting methods Copyright 2018 Jenn1in0g8s
Advisory Group LLC

194

The Act: Page 108
Post termination
Transition Period

• Effective 12/31/2017

• When an “S” corporation terminates back to a
“C” corporation it normally has 1 year to get the S
corporation AAA out without a double tax.

• This rule allows an additional period of time to
receive those monies using a ratio of AAA to E&P.

Copyright 2018 Jenn1in0g9s
Advisory Group LLC

The Act – §199A Page 109

Pass Through Business Inc. – S1/2

• Deduction of up to 20% of profits from

– Sch. C
– Sch. F
– Sch. E if activity is a trade or business,

including rentals
– Partnership pass through income
– S Corporation pass through income

Copyright 2018 Jennings Advisory Group LLC 110

195

Entity Returns Filed in 2016 –

pg. 109 – Slide 2/2

Type Number of As a %
Returns Filed

Sole Proprietors 25,631,831 69.9%

Partnerships 4,005,907 10.9%

S Corporations 4,831,588 13.2%

C Corporations 2,207,723 6.0%

Total 36,677,049 100%

Copyright 2018 Jennings
Advisory Group LLC

The Act – §199A Page 110

Pass Through Business Inc. – S 1/3

• Lesser of

1. 20% of qualified trade or business income,
REIT dividends and publicly traded
partnership income, OR

2. 20% of taxable income less capital gains
and co-op dividends

• Plus, lesser of

1. 20% of co-op dividends, or
2. Taxable income less capital gains

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The Act – §199A Page 110

Pass Through Business Inc. S 2/2

• Example – deduction calculation 113
• Harvey’s Sch. C income is $100,000,

taxable income is $88,000 (no capital
gains)
• Deduction is calculated

– Lesser of

1. $20,000 or $17,600, plus
2. $0

– Harvey’s §199A deduction is $17,600

Copyright 2018 Jennings Advisory Group LLC

The Act – §199A Page 110

Pass Through Business Income

• Variation – Harvey’s Sch. C income is
$100,000, taxable income is $138,000
including $10,000 of capital gains

• Deduction is calculated

– Lesser of

1. $20,000 or $25,600 (($138,000 - $10,000) x 20%),
plus

2. $0

– Harvey’s §199A deduction is $20,000

Copyright 2018 Jennings Advisory Group LLC 114

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The Act – §199A Page 111

Pass Through Business Inc.- S 1/2

• Multiple business activities must be
combined

• Net losses from qualified business
activities are carried forward to
subsequent year to offset qualified income

– Required even if no tax benefit

– But, not required if loss not used to calculate
taxable income (e.g. suspended passive loss)

Copyright 2018 Jennings Advisory Group LLC 115

The Act – §199A Page 111

Pass Through Business Inc. – S 2/2

• Example - Sarah’s 2018 Sch. C income is
$40,000, deductible Sch. E loss is $60,000

– Combined activity loss is $20,000

– Must be carried over to 2019

• In 2019, Sch. C income is $50,000, Sch. E
loss is $20,000, resulting in $30,000 total

– Sarah calculates $6,000 §199A deduction

– But, she must subtract $4,000 from her
deduction (2018 loss of $20,000 x 20%)

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