What's new for 2018: Game-changing tax overhaul in place for individuals-Part II

Small Business Accounting - The new tax year is a true game-changer for taxpayers and their advisers, as many fundamental, decades-old tax rules have been repealed or suspended, with many new ones going into effect. This article, the second of a series, highlights the tax changes that apply in 2018 to individuals relating to deferred compensation, tax-preferred accounts, retirement plans, estate and gift taxes, capital assets and investments, and disaster losses.

 New deferral election for stock grants of startups. Generally effective for stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017, a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by a qualified employer. ( Code Sec. 83(i) ) The election applies only for income tax purposes; the application of FICA and FUTA is not affected. If the election is made, the income has to be included in the employee's income for the tax year that includes the earliest of five events, one of which is the first date on which any stock of the employer becomes readily tradable on an established securities market. ( Code Sec. 83(i)(1)(B) )

The new election applies for qualified stock of an eligible corporation. A corporation is treated as eligible for a tax year if: (1) no stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and (2) the corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation in the US (or any US possession) are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock. ( Code Sec. 83(i)(2)(C) )

Detailed employer notice, withholding, and reporting requirements apply with regard to the election. ( Code Sec. 83(i)(6) )

ABLE account liberalizations. Effective for tax years beginning after Dec. 22, 2017, and before Jan. 1, 2026, after the overall limitation on contributions to ABLE accounts is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual's compensation for the tax year. ( Code Sec. 529A(b) ) Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account. ( Code Sec. 25B(d)(1) )

For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. ( Code Sec. 529(c)(3) ) Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

Expanded use of Sec. 529 accounts. For distributions after Dec. 31, 2017, "qualified higher education expenses" for purposes of the Code Sec. 529 rules, include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. ( Code Sec. 529(c)(7) )

Crackdown on recharacterizations. For tax years beginning after Dec. 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. ( Code Sec. 408A(d) )

ABA Tax Accounting observation: Although the effective date for the provision eliminating the election to unwind such a conversion is stated as being for tax years beginning after Dec. 31, 2017, there has been some speculation among tax professionals that the ability to make such an election to unwind may be able to be made up to the date that a return is due. Simply put, the interpretation at issue is: does the effective date (i.e., before 2018) refer to the tax year when the recharacterization is made, or the tax year when the unwinding occurs?

Liberalized rules for awards to volunteers. For tax years beginning after Dec. 31, 2017, the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service, is increased from $3,000 to $6,000. ( Code Sec. 457(e) )

Extended rollover period for plan loan offset amounts. For plan loan offset amounts which are treated as distributed in tax years beginning after Dec. 31, 2017, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs-that is, the tax year in which the amount is treated as distributed from the plan. A qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee's separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. A loan offset amount is the amount by which an employee's account balance under the plan is reduced to repay a loan from the plan. ( Code Sec. 402(c) )

Estate & gift tax exemption increased. For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million. ( Code Sec. 2010(c)(3) )) The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

New holding period requirement for carried interest. Effective for tax years beginning after Dec. 31, 2017, there's a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. ( Code Sec. 1061 ) If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer's gain will be treated as short-term gain taxed at ordinary income rates. ( Code Sec. 1061(a) )

Capital asset treatment barred for certain self-created property. Effective for dispositions after Dec. 31, 2017, the definition of a "capital asset" does not include patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created). ( Code Sec. 1221(a)(3) )

Like-kind exchange crackdown. Generally effective for transfers after Dec. 31, 2017, gain on like-kind exchanges is deferred only with respect to real property that is not held primarily for sale. However, under a transition rule, the prior-law like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017. ( Code Sec. 1031 )

Repeal of rollover of publicly traded securities gain into specialized SBICs. For sales after Dec. 31, 2017, the tax-favored rollover under former Code Sec. 1033 of publicly traded securities gain into specialized SBICs is repealed.

Broadened incentives for Qualified Opportunity Zone investment. Effective on Dec. 22, 2017, a new rule provides temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund. ( Code Sec. 1400Z-2 , as added by Act Sec. 13823)

Deductions for net disaster losses. For any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, an individual's standard deduction is increased by the net disaster loss. (Tax Cuts and Jobs Act Sec. 11028(c)(1)(C)) Additionally, if any individual has a net disaster loss for any tax year beginning after Dec. 31, 2017 and before Jan. 1, 2026, the AMT adjustment for the standard deduction doesn't apply to the increase in the standard deduction that is attributable to the net disaster loss. (Tax Cuts and Jobs Act Sec. 11028(c)(1)(D))

A net disaster loss is the excess of (i) qualified disaster-related personal casualty losses, over (ii) personal casualty gains. "Qualified disaster-related personal casualty losses" are those described in Code Sec. 165(c)(3) that arise in a 2016 disaster area, namely any area with respect to which a major disaster was declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016. (Tax Cuts and Jobs Act Sec. 11028(a))

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Possible Impacts of Federal Tax Reform on State Taxation

Small Business Accounting - On December 22, 2017, President Trump signed into the "Tax Cuts and Jobs Act", P.L. 115-97 (the Act). While this is a significant event for federal taxation, it will also have far-reaching effects on state taxation.

Income taxes. Almost all state income taxes piggyback on the federal system by using a federal starting point for calculating state taxable income. As a result of this federal conformity, states incorporate a lot of federal provisions into their own state tax bases. States generally conform to varying versions of the Internal Revenue Code, with a few exceptions. Roughly half of the states imposing an income tax conform to the Internal Revenue Code as of a specific date (e.g., as of December 31, 2016) that the state legislature updates annually or periodically, while the other half conform to the current code on a rolling basis without need for legislative action. If federal income is changed due to tax reform, state taxable income may be as well, depending on the provision and the state.

States will not be directly impacted by the new federal tax rates because states use their own rates. States that impose a gross receipts tax in lieu of a net-income based tax may not be as significantly impacted by the Act.

Timing will be the overriding consideration for state conformity to federal tax reform. State legislatures will not be back in session until next year to even begin to respond to the sweeping federal changes. States that have static conformity dates will still conform to previous versions of the Code (absent legislative action), resulting in increased compliance burdens for taxpayers who have to compute a hypothetical federal starting point based on the old Code.

Changes to federal corporate deductions will impact states that conform to those provisions. Most states conform to Code Sec. 163, so the new federal limitations on interest deductions may result in a broader state tax base in those states. Similarly, changes to federal net operating loss (NOL) provisions may impact states that conform to the federal provisions. However, many states already decouple from the Code Sec. 172 federal NOL deduction and instead use a state-specific NOL. Elimination of the federal Code Sec. 199 deduction will also create a broadened tax base in states that conformed to the deduction.

Many state decisions to conform to or decouple from federal tax reform will be budget-driven. Unlike the federal government, nearly all states have to maintain balanced budgets. Therefore, they may not be able to afford to conform to federal provisions that would result in a revenue reduction for the state. For example, states may choose to decouple from or limit the new provisions allowing immediate expensing of capital investments. Many states have historically decoupled from special federal depreciation provisions, like bonus depreciation, because of revenue concerns. It will be interesting to see whether states consider the net impact of conformity to interest expense caps in conjunction with potentially disallowing the new expensing regime.

State conformity to the international provisions in the Act may be more complicated. Conformity to the foreign-source dividend exemption and repatriation of offshore earnings will depend on a state's treatment of foreign income. The impact may be ameliorated in combined reporting states where certain foreign dividends are already eliminated as intercompany transactions. Further, unlike the federal government, states are constitutionally limited in their ability to treat foreign dividends in a different manner than domestic dividends.

Both state and federal practitioners should carefully consider unintended state consequences of new federal planning opportunities that may arise from tax reform. For example, service providers may acquire new revenue streams or property to qualify for or increase the amount of the pass-through deduction. However, adding new business operations or property to a pass-through entity may trigger nexus for the entity or its owners in a new state or affect the apportionment factors used to calculate state tax liability.

The Act may also impact individual taxation at the state level. In states that use federal taxable income as the starting point for computing state taxable income, the state would conform to the federal increased standard deduction and the federal elimination of personal exemptions. States may or may not conform to other changes to federal personal income tax provisions. In later years, states will need to decide whether to conform to the expiration of these changes as well.

Limitations on the federal state and local tax (SALT) deduction may impact individuals indirectly at the state level. Inability to deduct more than $10,000 of state and local taxes for federal purposes will increase the cost of those taxes for individuals, especially in high-tax states. Notably, the Act does not allow taxpayers to pre-pay state income taxes to take advantage of higher deduction amounts in 2017 and avoid the 2018 cap. While there is no equivalent restriction relating to property or sales and use taxes, the structure of these taxes and local rules may limit the effectiveness of prepayment as a tax reduction strategy.

Estate taxes. While few states impose an estate tax, some states may see reduced revenues to the extent those states conform to the new federal exemption amount.

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CEO, ABA Tax Accounting

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W-2 and W-3 Forms Filing Deadlines are in January

Small Business Accounting - IR-2017-189 was released to remind employers and other businesses of the 1/31/18 deadline that now applies to filing wage statements and independent contractor forms with the government. As a result of the Protecting Americans From Tax Hikes Act, employers must file their Forms W-2 and W-3 with the Social Security Administration by 1/31/18. That filing deadline also applies to some Forms 1099-MISC filed with the IRS reporting nonemployee compensation to independent contractors. This deadline makes it easier to verify income that individuals report on their tax returns and helps prevent fraud. The extension to file Forms W-2 is no longer automatic and extensions will be granted only for specific reasons.

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Amare Berhie, Senior Accountant           

CEO, ABA Tax Accounting

CFO Services http://youtu.be/EYJdQtbPZAI

http://www.abataxaccounting.com/HealthcareAccounting.php

amare@abataxaccounting.com   

(651) 300-4777

Medical Device Tax Back in Effect After Two-Year Pause

Small Business Accounting - A 2.3 percent tax on the sale of medical devices went back into effect on Monday after a two-year suspension, despite opposition by U.S. lawmakers and the medical manufacturing industry.

The excise tax on catheters, pacemakers and other healthcare products was among several fees and taxes imposed in January 2013 to help fund the Affordable Care Act, also known as Obamacare. It was projected to raise roughly $30 billion over a decade.

After drawing harsh criticism from both political parties as well as medical industry lobbying groups, the U.S. Congress approved a suspension of the levy in 2015.

The suspension expired on New Year's Day after unsuccessful last-ditch efforts by Republicans.

Republicans would have automatically killed the tax if they had succeeded in repealing Obamacare last year. The levy remained in Republican-crafted tax legislation signed by President Donald Trump on Dec. 22.

Supporters of the tax say it has helped provide health insurance to millions of previously uninsured Americans.

Critics, who have vowed to keep fighting the levy, say it has stifled the medical industry and slashed jobs.

"The tax has had a significant negative impact on medical innovation and has resulted in the loss or deferred creation of jobs", the Advanced Medical Technology Association lobbying group said on its website.

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Goldman Warns Of $5-Bln Earnings Hit from U.S. Tax Law

Experienced Tax Accountant – Goldman Sachs Group Inc said on Friday it would take a $5 billion earnings hit in the fourth quarter for the new U.S. tax law, becoming the first major U.S. bank to detail the law's one-time impact on corporate profits held overseas.

Set to take effect on Monday, the sweeping tax code changes enacted a week ago by President Donald Trump were expected to mean short-term pain, but long-term gain for U.S.-based corporations, like Goldman, that do business worldwide.

Like many such companies, Goldman has stored away billions of dollars in profits abroad. It did so under a law that lets multinationals avoid the present 35-percent, U.S. corporate tax rate as long as those profits did not enter the United States.

The new law encourages companies to repatriate those earnings and slaps a mandatory tax on them of 15.5 percent on cash and liquid assets, or 8 percent on illiquid assets, regardless of whether the earnings come home or not.

Scores of large companies, including other big banks such as Citigroup and JPMorgan Chase & Co, have socked away an estimated $2.8 trillion overseas in recent years. The one-time tax on those earnings is expected to raise $339 billion in federal revenues over the coming decade, according to the Joint Committee on Taxation (JCT), a nonpartisan research arm of the U.S. Congress.

That will hurt multinationals for a while, but they will have eight years to pay the taxes due. Some other tax breaks for banks will be eliminated or narrowed, under the new law, ranging from limits on deducting interest to curbs on deducting premiums paid to the Federal Deposit Insurance Corp.

Some U.S. financial companies have disclosed hits related to deferred tax assets from losses they suffered during the 2007-2009 financial crisis.

Citigroup has said it expects as much as a $20 billion charge to earnings for this, while Bank of America has detailed a $3 billion charge to fourth-quarter profit.

But these negatives should be more than offset in the long run by other changes under the law, analysts said.

Foremost among these profit-enhancing changes will be a deep cut in the overall U.S. corporate income tax rate to 21 percent from 35 percent. That will cut U.S. corporations' federal tax bills by more than $1.3 trillion over the next decade, based on JCT research.

Worldwide to Territorial

The new law will also shift U.S. corporate taxation to a "territorial" system. Under the present, "worldwide" system, Washington taxes active foreign profits, if they are repatriated, at the same rate as domestic profits.

Under the new territorial system, domestic profits will still be taxed, but profits earned abroad by U.S.-based multinationals, within some limits, will no longer be taxed.

This was expected to reduce federal tax revenues by $224 billion over a decade, the JCT estimates. A collection of new minimum and anti-base erosion taxes will offset those losses, but for the most part, the territorial system represents a major win for corporate lobbyists who have been pursuing such a change for decades.

The new law, passed by Republicans in the U.S. Congress over the united opposition of Democrats, marked Trump's first significant legislative victory since taking office in January.

Multinationals had pushed for many years for a discounted rate on tax-deferred foreign profits. Under the Republican bill, they finally got it. Analysts expect repatriated earnings to go mostly to stock buybacks and shareholder dividends.

JPMorgan, Wells Fargo and Morgan Stanley did not immediately respond to requests for comments.

(Reporting By Aparajita Saxena in Bengaluru; Writing by Lauren Tara LaCapra and Kevin Drawbaugh; Editing by Shounak Dasgupta and Andrew Hay)