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March 26, 2018
Tax Cuts & Jobs Act : Flow-through Specified Service Business
Richard Yelton & Laura Berry
Overview • Signed into law on December 22, 2017• Largest major tax reform since 1986• Highlights:
– Permanent reduction of C corporation tax rate to 21% – Significant changes to the treatment of foreign income– Overhaul of individual rates and deductions– Deduction for pass-through qualified business income
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Individual ProvisionsEffective 2018
• Highest rate reduced from 39.6% to 37%• Dollar thresholds for brackets increased• The 3.8% NIIT and 0.9% Medicare tax remain• State tax deduction limited• Individual provisions set to expire after 2025
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Individual Tax Rates - Single
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Single
2018 Taxable Income Prior Law New Law
$0 – 9,525 10% 10%
$9,525 – 38,700 15% 12%
$38,700 – 82,50025%
22%
$82,500 – 93,70024%
$93,700 – 157,50028%
$157,500 – 195,45032%
$195,450 – 200,00033%
$200,000 - 424,950
35%$424,950 – 426,700 35%
$426,700 – 500,00039.6%
$500,000 + 37%
Individual Tax Rates – (MFJ)
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Married Filing Joint (MFJ)
2018 Taxable Income Prior Law New Law
$0 - 19,050 10% 10%
$19,050 - 77,400 15% 12%
$77,400 - 156,150 25%22%
$156,150 - 165,00028%
$165,000 - 237,95024%
$237,950 - 315,000
33%$315,000 - 400,000 32%
$400,000 - 424,950
35%$424,950 - 480,050 35%
$480,050 - 600,00039.6%
$600,000 + 37%
Business Changes - Highlights
• Depreciation– Bonus Depreciation– Section 179 Expense– Luxury Auto
• Interest Expense• Entertainment Expenses
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Bonus Depreciation & Section 179 Expense
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Luxury Auto
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Interest Expense Limitation
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Net interest expense incurred by a business limited to 30% of adjusted taxable income.
Does not apply to businesses with average annual gross receipts of $25M or less.
Disallowed interest may be carried forward indefinitely.
Limitation applied at the entity level (partnerships).
Meals and Entertainment
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Pass-through Provisions
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Pass-through Deduction• For 2017 – pass-through income taxed at individual rates up to
39.6%.• Beginning in 2018 – Taxpayers who have “Qualified Business
Income” (QBI) from a partnership, S corporation or sole proprietorship entitled to up to a 20% deduction on QBI.
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Qualified Business Income• Business income other than investment income• Does not include
– guaranteed payments– wages earned as an employee– foreign earned income
• Determined separately for each separate business you own• Determine each business separately and then net them together
– (net income and losses together)
• Limited to your Net Taxable Income before the QBI Deduction
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Specified Service Business
• Includes health, law, accounting, performing arts, consulting, athletics, financial services, brokerage services
• Includes investing and investment management trading, or dealing in securities, partnership interests, or commodities
• Excludes architect and engineers
• Includes any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners
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Pass-through Deduction Thresholds For Specified Service Businesses
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Taxable Income Thresholds Deduction
< $157,500 (Single/MFS)< $315,000 (MFJ)
Full Deduction
$157-500 - $207,500 (Single/MFS)$315,000 - $415,000 (MFJ)
Limited Deduction (Danger Zone)
> $207,500 (Single/MFS)> $415,000 (MFJ)
No Deduction
Deduction before phaseout reduction is limited to the lesser of
– 20% of qualified business income or– Greater of
• 50% Allocable W-2 wages of the business (wage limitation) or
• 25% Allocable W-2 wages of the business plus 2.5% unadjusted basis of assets (wage/asset limitation)
Qualified Business Income in the Danger Zone
Lower threshold Upper thresholdSingle = $157,000 Single = $207,500MFJ = $315,000 MFJ = $415,000
Taxable Income - lower thresholdUpper threshold – lower threshold
($50,000 single / $100,000 MFJ)
Phaseout Reduction
Pass-through Deduction Flowchart
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20% deduction on QBI phased
out
Example Danger ZoneFacts:• Assume C is a married filing joint (MFJ) Taxpayer• C is a 100% owner of an S corporation – specified service business• C’s personal taxable income is $375,000• In 2018 the S corporation
– Generated ordinary income of $200,000– Paid total W-2 wages of $2,000,000– Had total unadjusted basis in qualifying property of $150,000
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Example 1 – Danger Zone
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20% deduction on QBI phased
out
Example 1 - Danger Zone• C’s personal taxable income is $375,000• In 2018 the S corporation
– Generated ordinary income of $200,000– Paid total W-2 wages of $2,000,000– Had total unadjusted basis in qualifying property of $150,000
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$40,000 – $24,000 = $16,000 QBI Deduction
Example 1 - Danger Zone
Example 2 - Danger Zone Wage Limitation
• C’s personal taxable income is $375,000• In 2018 the S corporation
– Generated ordinary income of $200,000– Paid total W-2 wages of $75,000– Had total unadjusted basis in qualifying property of $150,000
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$37,500 – $22,500 = $15,000 QBI Deduction
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Example 2 - Danger Zone Wage Limitation
Comparison – No Wage Limit
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20% deduction on QBI phased
out
Comparison - $0 Wages
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20% deduction on QBI phased
out
Planning is KeyPlanning ideas• Increasing Deductions
– Charitable contributions / Donor advised fund– Bonus Depreciation / Section 179 Expensing– Retirement Plan Contributions
• Analysis of Wages / Reasonable Compensation• Consideration of Guaranteed Payments • Carve-out of non-service segments of a business
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Flow-Through vs. C-CorporationAnnual Operations
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20% deduction on QBI phased
out
Flow-Through vs. C-CorporationSale of Business Assets
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20% deduction on QBI phased
out
Tax Reform (10 years, billions)
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Revenue Raisers
Personal exemptions $1,212
State income tax 668
Repatriation tax 339
Shared responsibility payment 314
Business interest deductions 253
Corporate NOL 201
Base erosion and anti abuse tax 150
Chained CPI 134
Research expense amortization 120
Other 131
GILTI 112
Domestic production deduction 98
Like kind exchange 31
Total $3,762
Revenue Losers
Corporate tax rate $(1,349)
Individual tax rates (1,214)
Standard deduction (720)
Individual AMT (637)
Child tax credit (544)
Qualified business income (265)
Corporate dividends received (224)
Depreciation write offs (112)
Estate tax exemption (83)
Corporate AMT (40)
Simplified accounting-small business (31)
Total $(5,219)
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Contact Us
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Laura Berry, CPA678-510-2790
lberry@windhambrannon.com
Richard Yelton, CPA678-510-2811
ryelton@windhambrannon.com
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