Navigating Tomorrow's Tax Landscape - 2020

1. marcumllp.com
Navigating Tomorrow’s
Tax Landscape
Presented by:
Christopher G. Sivak, CPA

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Individual Tax Rates
Individual rate reduction and brackets (rates sunset at the end of 2025)
Unmarried Individuals, Tax Brackets and Rates, 2019
Rate Taxable Income Over
10% $0
12% $9,700
22% $39,475
24% $84,200
32% $160,725
35% $204,100
37% $510,300
Married Individuals Filing Joint Returns, Tax Brackets and Rates, 2019
Rate Taxable Income Over
10% $0
12% $19,400
22% $78,950
24% $168,400
32% $321,450
35% $408,200
37% $612,350

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Itemized Deductions
State and Local taxes
 Deduction limited to $10,000 for the aggregate
of 1) State & local real and personal property
taxes and 2) State & local income tax (or state
& local sales tax paid, if higher)
Mortgage Interest
 Deduction for mortgage interest paid or incurred capped at $750,000
(MFJ) or $375,000 (MFS) of acquisition indebtedness for tax years 2018
to 2025.
 New lower limit doesn’t apply to acquisition indebtedness incurred
before 12/15/2017.
 Deduction for interest on home equity indebtedness is suspended until
12/31/2025.

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Itemized Deductions
Medical Expenses threshold
 Retains the deduction and the 10% of AGI limitation
is reduced to 7.5% for 2017 and 2018.
Charitable Donations
 Deduction for cash contributions modified to
increase AGI limitation to 60% for 2018-2025
 The donee-reporting exemption from the
contemporaneous written acknowledgment
requirement is repealed
 No deduction for amounts paid for college athletic
seating rights

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Itemized Deductions
Deductions Suspended (2018-2025)
 Personal casualty and theft losses (except for losses incurred in a
Federally-declared disaster)
 Moving expenses (except for members of Armed Forces on active
duty pursuant to military order and on permanent change of
station)
 “Pease” limitation
 Investment advisory fees, tax preparation fees, unreimbursed
business expense and other miscellaneous itemized deductions that
are subject to the 2% floor

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Savings Idea 1: “Bunching”
Consider bunching deductions such as charitable and medical in one
year that might otherwise be paid over two or more years
Donor-advised funds
You can make contributions to a fund you control and receive tax
deduction.
Contribution of appreciated securities escapes capital gain tax.
You direct disposition of fund over multiple years.
Available through most investment firms.

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Savings Idea 2” “QCD”
Take a qualified charitable distribution (“QCD”) from your IRA.
The distribution is NOT taxable AND counts toward required
minimum distributions.
By reducing adjusted gross income you may also lower the amount
of Social Security benefits that are taxed.

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Qualified Opportunity Fund
Qualified Opportunity Funds (“QOF”) permit investors to defer
recognition of capital gain on recent sales
 Gain must be reinvested in QOF not more than 180 days after a
sale or exchange and no later than December 31, 2026
 QOF must hold at least 90% of its assets in “qualified opportunity
zone property”
 8,700 zones across the U.S.; 320 in Ohio including much of Lodi
and an area southwest of Medina city square

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Qualified Opportunity Fund (continued)
Three benefits of QOF investment:
 A temporary tax deferral for capital gains reinvested in QOF;
deferred gain must be recognized on the earlier of sale date or
12/31/26
 Basis step-up for capital gains reinvested in QOF: 10% if the
investment in the qualified opportunity zone fund is held by the
taxpayer for at least 5 years, additional 5% if held for at least 7 years
 If the investment is held for at least 10 years: permanent exclusion
of post-acquisition appreciation from the sale of QOF

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Savings Idea 3: Invest in QOF
You can invest in a QOF up to the amount of your gross capital
gain income. (i.e. – If you have $50,000 of capital gain and
$40,000 of capital loss you can invest $50,000 in a QOF.)
There is a large market of QOFs that have emerged in the wake
of TCJA.
 Benefits:
1. No tax paid on 2019 gain.
2. Gain is reduced by up to 15% if holding period met.
3. Gain on QOF is tax-free if held 10 years.

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Saving Idea 4: Roth Conversion
If your taxable income is less than:
a) The threshold for the second lowest bracket ($39,475 for
individual filer, $78,950 for married joint),
b) And the sum of net long-term capital gain and qualified dividend
income
Then consider converting traditional IRA dollars to a Roth IRA. The
conversion is tax-free up to the above threshold.
Roth benefits:
1) Tax-free appreciation
2) Tax-free withdrawals
3) No minimum distributions

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Business Income Tax Rates (C Corp.)
Corporate tax rate
 Flat rate of 21% (effective 1/1/2018) also for applies to
Personal Holding companies
Corporate Alternative Minimum Tax (AMT)
 Repealed
 AMT credits refundable from 2018 through 2021 and can offset
regular tax liability.

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Selection of Entity
 C corporations (flat 21% rate) vs. Flow-Through Entity (maximum
37% rate (possibly 29.6% with sec 199A deduction)
 Considerations
 Is C corporation eligible for sec 1202 stock treatment?
 Impact on additional capital contributions.
 Net Investment Income Tax on some flow-through entity owners.
 Impact of deductibility of state income taxes to C corporation.
 AMT impact. Elimination for C corporation vs higher thresholds
for individuals.
 Business profits reinvested or distributed?
 Owner sale or transfer to children?
 Structuring transactions to maximize shareholder goodwill position
for future sale.

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Savings Idea 5: Entity Selection
Take all considerations into account. Current tax costs under any form
of organization can be calculated or estimated. More challenging is
predicting the future.

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Bonus Depreciation
Bonus Depreciation:
 A 100% first-year deduction for the adjusted basis is allowed for
qualified property placed in service after 9/27/2017 and before
1/1/2023.
 Allowed for both new and used property.
 The first-year bonus depreciation deduction phases down as follows
 2023 80%
 2024 60%
 2025 40%
 2026 20%

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Bonus Depreciation
 Real Property and Qualified Real Estate Improvement Property
(QIP)(statutory glitch) - was intended to be depreciable over 15 years
and to be eligible for bonus depreciation.
 Statutory language makes QIP subject to 39-year MACRS life and
not eligible for bonus depreciation.
 Section 179 Expense: Increased to $1 million for year 2018
(adjusted for inflation) with phaseout for cost between
$2.5 million and $3.5 million.
 QIP is eligible for section 179 expensing.
 Other inclusions under TCJA for sec 179 treatment are:
Roofs, heating, ventilation, air-conditioning, fire, alarm and
security systems.

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Savings Idea 6: Cost Segregation
Cost segregation studies are being performed on most buildings
costing over $1 million.
A recent study for an apartment building with a total cost of
$15 million resulted in identifying $2.8 million of costs eligible
for bonus depreciation.

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Net Operating Losses (NOL)
 NOLs limited to 80% of taxable income for tax periods after
12/31/2017
 No carryback except for certain losses incurred in trade or
business of farming
 Can be carried forward indefinitely

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Interest Expense
Cap on net business interest expense (every business, regardless of form)
 Limited to 30% of “adjusted taxable income,” business interest income
and floor plan financing interest of the taxable year
 Adjusted taxable income = taxable income without regard to:
 Net interest expense
 NOLs
 Depreciation, amortization and depletion
 Unused expense carried forward indefinitely
 Businesses with less than $25M average annual gross receipts exempt
(unless it is a “tax shelter”)

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Example: Interest Expense Limitation
 ABC Co. has taxable income of $150,000. Included in that amount is $10,000 of
interest income, $100,000 of interest expense, $120,000 of depreciation and
$10,000 of amortization. The adjusted taxable income and limitation is
computed as follows:
Taxable income $150,000
Interest income – $10,000
Interest expense + $100,000
Depreciation + $120,000
Amortization + $10,000
Adjusted taxable income $370,000
 When multiplied by 30%, the preliminary limitation is $111,000. The total
limitation is $111,000 plus interest income of $10,000, or $121,000. Because
interest expense of $100,000 is less than the limitation, the entire interest
expense is deductible.

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Example: Interest Expense Limitation (continued)
Consider the same facts as above, except taxable income is now $50,000.
The adjusted taxable income is computed as follows:
Taxable income $50,000
Interest income – $10,000
Interest expense + $100,000
Depreciation + $120,000
Amortization + $10,000
Adjusted taxable income $270,000
When multiplied by 30%, the preliminary limitation is $81,000. The total limitation
is $81,000 plus interest income of $10,000, or $91,000. Because of the limitation,
ABC Co. can only deduct $91,000 of interest expense.
The disallowed interest expense of $9,000 is then carried forward indefinitely.

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Small Business Accounting Rules
 Tax Cuts & Jobs Act (TCJA) provides a number of accounting rule
simplifications for taxpayer (not a “tax shelter”) with less than
$25 million of average gross receipts of prior three years:
 Cash Basis allowed for C corps and partnerships with C corp partners.
 Cash Basis allowed for businesses with inventories (which need to be
treated as non-incidental cost or treated in conformity with the taxpayer’s
financial accounting method).
 UNICAP not required for small businesses, including producers.
 Percentage of Completion method not required for long-term contracts
expected to be completed within a 2-year period. Completed contract
method can be used.
 IRS requires aggregation of related entities (controlled group of
corporations, commonly controlled businesses, affiliated service groups,
management companies).

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Savings Idea 7: Converting to Cash Basis
Acme Manufacturing is a pass-through entity and has the following income
statement and select balance sheet attributes:
Sales $14,000,000
Cost of goods sold $(9,000,000)
Gross margin $5,000,000
Selling, general & administrative $(4,000,000)
Net income $1,000,000
Accounts receivable $1,800,000
Inventory:
Raw materials $800,000
WIP $400,000
Finished goods $700,000
$1,900,000
Accounts payable and accruals $(1,500,000)
Acme’s WIP consists of $200,000 of raw materials and $200,000 of labor and
overhead. Their finished goods consists of $300,000 of raw materials and
$400,000 of labor and overhead.

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Savings Idea 7 (continued)
The benefit of converting from the accrual method to the cash
method of accounting is determined as follows:
Accounts receivable $1,800,000
Labor and overhead in inventory ($200,000 + $400,000) $600,000
Accounts payable and accruals $(1,500,000)
Net amount of income deferred $900,000
Cash tax savings at 29.6% (37% top individual tax rate reduced by
Qualified Business Income deduction) $266,400

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Qualified Business Income Deduction
 S corporations, Partnerships or Sole proprietorship:
 New deduction for Pass-through income (Deduction for
“domestic qualified business income”)
 Deduction of 20% of domestic qualified business income (QBI)
for taxpayers engaged in a “qualified trade or business”; subject
to limitation, expires 12/31/2025.
 QBI is defined as the net amount of qualified items of income,
gain, deduction and loss with respect to trade or business.
 The deduction reduces taxable income, rather than adjusted
gross income.

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Qualified Business Income Deduction
Qualified Trade or Business = all trades businesses except:
 The trade or business of performing services as an employee, and
 “Specified service” trades or businesses, those involving the
performance of services in:
 Health
 Law
 Accounting
 Actuarial sciences
 Performing arts
 Consulting
 Athletics
 Financial services
 Brokerage services,
 Or where the business's principal asset is the reputation or skill of one
or more owners or employees

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Qualified Business Income Deduction
 Limitations:
The deduction cannot exceed the greater of:
 50% of the W-2 wages with respect to the qualified trade
or business, or
 The sum of 25% of the W-2 wages plus 2.5% of the
unadjusted basis of all qualified property.
 Taxpayers over “Threshold” amount : $157,500 for single filers
($315,000 married filing joint)

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Qualified Business Income Deduction
 Certain types of Income excluded from QBI:
 Capital gains or losses
 Dividends
 Interest Income (unless interest is properly allocable
to the business)
 Employee compensation
 Guaranteed payments to a partner

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Savings Idea 8: QBI Deduction
Acme Manufacturing, owned by Jane Acme, is a pass-through entity
and has the following income statement:
Sales $14,000,000
Cost of goods sold $(9,000,000)
Gross margin $5,000,000
Selling, general & administrative $(4,000,000)
Net income $1,000,000
The company incurred wage expense of $1,800,000 and the unadjusted
basis of its qualified property is $7,000,000.

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Savings Idea 8: QBI Deduction (continued)
Jane Acme’s QBI deduction is the lesser of:
20% of Qualified Business Income $200,000, or
The greater of:
50% of Wages $900,000
Or 25% of wages, plus $450,000
2.5% of the unadjusted basis of qualified property $175,000 $900,000
$625,000
Jane Acme’s QBI deduction is $200,000. If Jane is taxed at the new highest marginal rate of 37% the QBI
deduction reduces her tax from $370,000 (37% of $1,000,00) to $296,000 (37% of $800,000 and 29.6% of
$1,000,000).

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Savings Idea 8: QBI Deduction (continued)
Same facts as above except cost of goods sold is $5,000,000
instead of $9,000,000:
Sales $14,000,000
Cost of goods sold $(5,000,000)
Gross margin $9,000,000
Selling, general & administrative $(4,000,000)
Net income $5,000,000
The company incurred wage expense of $1,800,000 and the unadjusted basis of its qualified
property is $7,000,000.

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Savings Idea 8: QBI Deduction (continued)
Jane Acme’s QBI deduction is the lesser of:
20% of Qualified Business Income $1,000,000, or
The greater of:
50% of Wages $900,000
Or 25% of wages, plus $450,000
2.5% of the unadjusted basis of qualified property $175,000 $900,000
$625,000
Jane’s QBI deduction is limited.
What happens if Acme Manufacturing pays Jane a bonus of $200,000?

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Savings Idea 8: QBI Deduction (continued)
Jane Acme’s QBI deduction is the lesser of:
20% of Qualified Business Income (20% x $4,800,000) $960,000, or
The greater of:
50% of Wages $1,000,000
Or 25% of wages, plus $500,000
2.5% of the unadjusted basis of qualified property $175,000 $1,000,000
$675,000
Jane’s QBI deduction increases by $60,000 from $900,000 to $960,000. Her W-2 income increases by the
same amount that her pass-through income decreases. The additional QBI deduction reduces her income
tax by $22,200 (37% of $60,000). (The savings is offset by a minor amount of payroll tax on the bonus.)

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Proposed Regulations - QBI
Issued August 8, 2018, the regulations provide:
 Anti-abuse measures to prevent
 “Crack and Pack” strategy
 Relabeling employees as independent contractors
 Minor service income exception (10% if <$25 million, 5% if >$25 million)
 Aggregation Rules

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QBI Aggregation Rules
 Taxpayer requirements:
 Same person or group owns 50% or more of aggregated businesses
 50% test must be satisfied for most of taxable year
 All aggregated items must be reported on returns with same tax year
 Specified services trades or businesses cannot be aggregated
 Aggregated businesses must meet two of three factors:
 They provide products/services customarily offered together
 Share facilities or significant centralized business elements
 Operated in coordination with, or reliance upon, one or more of the
businesses in the group

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Contact Information
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Christopher G. Sivak, CPA
Partner
csivak@skodaminotti.com
330-576-1832