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Highlights of the New Tax Reform Law


The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.

Below are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.



  • Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket) to 10%, 12%, 22%, 24%, 32%, 35% and 37% — through 2025
  • Near doubling of the standard deduction to $24,000 (married couples filing jointly), $18,000 (heads of households), and $12,000 (singles and married couples filing separately) — through 2025
  • Elimination of personal exemptions — through 2025
  • Doubling of the child tax credit to $2,000 and other modifications intended to help more taxpayers benefit from the credit — through 2025
  • Elimination of the individual mandate under the Affordable Care Act requiring taxpayers not covered by a qualifying health plan to pay a penalty — effective for months beginning after December 31, 2018
  • Reduction of the adjusted gross income (AGI) threshold for the medical expense deduction to 7.5% for regular and AMT purposes — for 2017 and 2018
  • New $10,000 limit on the deduction for state and local taxes (on a combined basis for property and income taxes; $5,000 for separate filers) — through 2025
  • Reduction of the mortgage debt limit for the home mortgage interest deduction to $750,000 ($375,000 for separate filers), with certain exceptions — through 2025
  • Elimination of the deduction for interest on home equity debt — through 2025
  • Elimination of the personal casualty and theft loss deduction (with an exception for federally declared disasters) — through 2025
  • Elimination of miscellaneous itemized deductions subject to the 2% floor (such as certain investment expenses, professional fees and unreimbursed employee business expenses) — through 2025
  • Elimination of the AGI-based reduction of certain itemized deductions — through 2025
  • Elimination of the moving expense deduction (with an exception for members of the military in certain circumstances) — through 2025
  • Expansion of tax-free Section 529 plan distributions to include those used to pay qualifying elementary and secondary school expenses, up to $10,000 per student per tax year
  • AMT exemption increase, to $109,400 for joint filers, $70,300 for singles and heads of households, and $54,700 for separate filers — through 2025
  • Doubling of the gift and estate tax exemptions, to $10 million (expected to be $11.2 million for 2018 with inflation indexing) — through 2025



  • Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Repeal of the 20% corporate AMT
  • New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • Other enhancements to depreciation-related deductions
  • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale
  • New tax credit for employer-paid family and medical leave — through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation


More to consider


This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.




Help Prevent Tax Identity Theft By Filing Early


If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 17 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 15.

But there’s another date you should keep in mind: the day the IRS begins accepting 2017 returns (usually in late January). Filing as close to this date as possible could protect you from tax identity theft.


Why it helps


In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.


A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major complications to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.


What to look for


Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2017 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2017 interest, dividend or reportable miscellaneous income payments. So be sure to keep an eye on your mailbox or your employer’s internal website.


Additional bonus


An additional bonus: If you’ll be getting a refund, filing early will generally enable you to receive and enjoy that money sooner. (Bear in mind, however, that a law requires the IRS to hold until mid-February refunds on returns claiming the earned income tax credit or additional child tax credit.) Let us know if you have questions about tax identity theft or would like help filing your 2017 return early





Updated 2018 Withholding Tables Now Available; Taxpayers Could See Paycheck Changes by February


WASHINGTON — The Internal Revenue Service today released Notice 1036, which updates the income-tax withholding tables for 2018 reflecting changes made by the tax reform legislation enacted last month. This is the first in a series of steps that IRS will take to help improve the accuracy of withholding following major changes made by the new tax law.


The updated withholding information, posted today on, shows the new rates for employers to use during 2018. Employers should begin using the 2018 withholding tables as soon as possible, but not later than Feb. 15, 2018. They should continue to use the 2017 withholding tables until implementing the 2018 withholding tables.


Many employees will begin to see increases in their paychecks to reflect the new law in February. The time it will take for employees to see the changes in their paychecks will vary depending on how quickly the new tables are implemented by their employers and how often they are paid — generally weekly, biweekly or monthly.   The new withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers to claim withholding allowances. This will minimize burden on taxpayers and employers. Employees do not have to do anything at this time.


“The IRS appreciates the help from the payroll community working with us on these important changes,” said Acting IRS Commissioner David Kautter. “Payroll withholding can be complicated, and the needs of taxpayers vary based on their personal financial situation. In the weeks ahead, the IRS will be providing more information to help people understand and review these changes."


The new law makes a number of changes for 2018 that affect individual taxpayers. The new tables reflect the increase in the standard deduction, repeal of personal exemptions and changes in tax rates and brackets.


For people with simpler tax situations, the new tables are designed to produce the correct amount of tax withholding. The revisions are also aimed at avoiding over- and under-withholding of tax as much as possible.


To help people determine their withholding, the IRS is revising the withholding tax calculator on The IRS anticipates this calculator should be available by the end of February. Taxpayers are encouraged to use the calculator to adjust their withholding once it is released.


The IRS is also working on revising the Form W-4. Form W-4 and the revised calculator will reflect additional changes in the new law, such as changes in available itemized deductions, increases in the child tax credit, the new dependent credit and repeal of dependent exemptions.


The calculator and new Form W-4 can be used by employees who wish to update their withholding in response to the new law or changes in their personal circumstances in 2018, and by workers starting a new job. Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4.


In addition, the IRS will help educate taxpayers about the new withholding guidelines and the calculator. The effort will be designed to help workers ensure that they are not having too much or too little withholding taken out of their pay.


For 2019, the IRS anticipates making further changes involving withholding. The IRS will work with the business and payroll community to encourage workers to file new Forms W-4 next year and share information on changes in the new tax law that impact withholding.




Ten Tips for Choosing a Tax Preparer


It’s the time of the year when many taxpayers choose a tax preparer to help file a tax return. These taxpayers should choose their tax return preparer wisely.  This is because taxpayers are responsible for all the information on their income tax return. That’s true no matter who prepares the return.


Here are ten tips for taxpayers to remember when selecting a preparer:


  1. Check the Preparer’s Qualifications. Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool helps taxpayers find a tax return preparer with specific qualifications. The directory is a searchable and sortable listing of preparers.
  2. Check the Preparer’s History. Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to the verify enrolled agent status page on or check the directory
  3. Ask about Service Fees. Avoid preparers who base fees on a percentage of the refund or who boast bigger refunds than their competition. When asking about a preparer’s services and fees, don’t give them tax documents, Social Security numbers or other information.
  4. Ask to E-File. Taxpayers should make sure their preparer offers IRS e-file. The quickest way for taxpayers to get their refund is to electronically file their federal tax return and use direct deposit.
  5. Make Sure the Preparer is Available. Taxpayers may want to contact their preparer after this year’s April 17 due date. Avoid fly-by-night preparers.
  6. Provide Records and Receipts. Good preparers will ask to see a taxpayer’s records and receipts. They’ll ask questions to figure things like the total income, tax deductions and credits.
  7. Never Sign a Blank Return. Don’t use a tax preparer who asks a taxpayer to sign a blank tax form.
  8. Review Before Signing. Before signing a tax return, review it. Ask questions if something is not clear. Taxpayers should feel comfortable with the accuracy of their return before they sign it. They should also make sure that their refund goes directly to them – not to the preparer’s bank account. Review the routing and bank account number on the completed return. The preparer should give you a copy of the completed tax return.
  9. Ensure the Preparer Signs and Includes Their PTIN. All paid tax preparers must have a Preparer Tax Identification Number. By law, paid preparers must sign returns and include their PTIN.
  10. Report Abusive Tax Preparers to the IRS. Most tax return preparers are honest and provide great service to their clients. However, some preparers are dishonest. Report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If a taxpayer suspects a tax preparer filed or changed their return without the taxpayer’s consent, they should file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit.




What the largest tax overhaul in 30 years means for companies

By  Matt Townsend


The impact of the biggest overhaul of the U.S. tax code in three decades will spread far and wide starting next year, highlighted by a cut in the corporate rate to 21 percent from 35 percent, fully allowable deductions for capital expenses and lower levies on repatriating overseas profits.

Here’s how the law will most likely affect various industries:


Real Estate/Homebuilders


Republicans firmed up late support for the overhaul by adding a measure that will provide a windfall to real estate investors like President Donald Trump. The change allows real estate businesses to claim a new tax break that’s planned for partnerships, limited liability companies and other so-called “pass-through” entities.


With U.S. housing on a roll since the financial crisis, homebuilders don’t want to see the good times end. Incentives that have promoted home ownership over renting came under attack during the legislative process, but the industry’s powerful lobbying organizations were able to minimize the damage.


The bill will allow interest deductions on the first $750,000 in new mortgage debt, down from the current limit of $1 million; the House had called for slashing it to $500,000. It also won back $10,000 in deductions for property and local income taxes, a figure still far below what many upper-income families pay in blue states like California, New York and New Jersey.




Tech stands to benefit from repatriation. U.S. companies are sitting on $3.1 trillion in overseas earnings, according to an estimate from Goldman Sachs Group Inc. The largest stockpile belongs to Apple Inc. at $252 billion—94 percent of its total cash. Microsoft Corp., Cisco Systems Inc., Google parent Alphabet Inc. and Oracle Corp. round out the top five, data compiled by Bloomberg show.


One caveat is that the repatriation provision could generate a large tax bill. In Apple’s case, a 14.5 percent rate would equate to $36.6 billion in taxes, or about $7 a share, according to Bloomberg Intelligence.


Asset Managers


Analysts expect the bulk of the tax savings to be spent on increasing dividends and share buybacks. That should push U.S. equity markets higher, increasing the value of investments held by asset managers.


Firms such as Federated Investors Inc. and Franklin Resources Inc. could also see more demand for their money management services, thanks to tax cuts for individuals, especially the wealthy.




The tax bill may boost 2018 earnings of big U.S. banks by an average of 13 percent, according to Goldman Sachs. Leading the way will be Wells Fargo & Co. (17 percent) and PNC Financial Services Group Inc. (15 percent).


Morgan Stanley says the overhaul is a net benefit for U.S. banks because it will help them compete better with lower-taxed international rivals. Many provisions in the bill, including repatriation of overseas cash, could spur U.S. mergers and acquisitions that would boost investment banking. And banks’ wealth management units are likely to see more money rolling in because the bill reduces tax rates on the rich.


But a reduction on interest-expense deductions will weigh on earnings. That provision may also cause companies to borrow less. It could be especially painful for banks such as Synovus Financial Corp. that have large exposure to real estate and commercial loans, Morgan Stanley said.


Lenders focused on consumers, such as Discover Financial Services and Synchrony Financial, are better positioned, because individuals already are unable to deduct interest expense, so there wouldn’t be a change in behavior, according to Morgan Stanley.


Private Equity


The reduction in corporate rates means companies should have more cash to fund acquisitions, which could increase the value of private equity-owned firms. There’s also likely to be more assets to buy. Many conglomerates have been holding onto non-core assets because they didn’t want to generate a big tax bill on the sale.


But just like banks, private equity will take a hit on the lowering of interest deductions. Financial firms use debt to fund acquisitions, and if borrowing becomes more costly that could disrupt their business models. It might also limit the size of deals.




The industry’s biggest companies, including General Motors Co. and Ford Motor Co., will benefit from the rate cut and the reduction on levies for repatriating overseas profits, according to UBS.


Big auto dealers, like AutoNation Inc., are also poised to do well because they are focused in the U.S. and pay high tax rates.


Consumer Products/Retail


Retailers are primed to be big winners from the rate cut because many generate all, or at least an overwhelming majority, of their income in the U.S. and pay some of the highest tax rates of any industry.


Full and immediate deductions on capital expenditures could allow at least one retailer to not owe any federal taxes the next two years. Aaron’s Inc., which leases televisions and refrigerators to consumers at more than 1,700 stores, will be able to use deductions on buying inventory, which are considered capital investments, to wipe out its tax bill in 2018 and 2019, according to Stifel Nicolaus & Co.


Chains and consumer brands also expect the tax bill to boost demand for their goods and services. Many of those companies rely on middle- and low-income shoppers for the bulk of their sales, and changes to individual taxes—such as doubling the standard deduction—will increase discretionary income.




In machinery, trucking is likely to see the biggest impact, according to Jefferies LLC. The corporate rate cut would give U.S. transportation companies of all sizes more money to upgrade their fleets with fuel-efficient vehicles. The bill’s increased deductions for capital spending would add another incentive to buy new 18-wheelers, a potential boon for truck makers like Paccar Inc. and Navistar International Corp.


The same can’t be said for farming and its equipment suppliers like Caterpillar Inc. Farmers are struggling to be profitable at current crop prices, which means the corporate tax cut will have little impact on them. But that could change if prices rise, Jefferies said.


The tax cut could also spur industrial giants to divest businesses that aren’t core to current strategy, Jefferies said. Many conglomerates have maintained divisions because selling them would generate a big tax bill.


The overhaul could be a boon for aircraft suppliers, like Boeing Co. and General Electric Co., because airlines need to upgrade their fleets, too.




Oil-and-gas companies will be big winners because they pay the second-highest effective tax rate of any sector, at 37 percent, according to Bloomberg Intelligence. But a number of oil explorers and equipment providers won’t benefit because their operations are unprofitable.


The industry also benefits from a measure that opens a portion of Alaska’s Arctic National Wildlife Refuge to oil and gas drilling, which could generate $1 billion in revenue over a decade.

The renewable-energy industry avoided taking a big hit by lobbying Republicans to keep a $7,500 electric-vehicle subsidy and a tax credit for wind-power production. But there is concern that the bill’s changes to how tax credits work may disrupt financing of wind and solar projects.

The coal industry notched a victory by getting the corporate alternative minimum tax killed—a move executives say will reduce bankruptcies.


Hospitals and Insurers


The bill is estimated to boost insurance companies’ profits by as much as 15 percent because they pay high rates, according Ana Gupte, an analyst at Leerink Partners.


But the repeal of Obamacare’s individual mandate won’t help health insurers and hospitals, which are coping with the Trump administration’s efforts to undermine the law. Ending the provision—a requirement that all Americans carry health insurance coverage or pay a fine—is likely to decrease the number of people who buy coverage. For hospitals, an increase in uninsured people means fewer paying customers.




U.S. drugmakers will be one of the biggest beneficiaries of the repatriation portion of the bill. They’ve been sitting on billions of dollars in overseas earnings and can now bring home that cash at a reduced rate. While the tax bill has been promoted by Republicans as a job creator, the reality is that drug companies are more likely to return the money to shareholders, or use it to make acquisitions.


Biotech and pharma companies will get a smaller tax credit for developing drugs for rare diseases. Under current law, they can deduct 50 percent of the cost of testing drugs for rare or orphan diseases that affect only small numbers of patients. The revised bill cuts that amount to 25 percent, raising government revenue by $32.5 billion over a decade.


Telecom Companies


This is another industry that is likely to increase capital investments because telecom companies regularly need to upgrade their networks. And the bill allows deductions on such spending to be immediate, instead of over several years. AT&T Inc. has said it will invest $1 billion more in U.S. infrastructure next year under the new tax plan.




Colleges have objected to the reversal of a rule that allows supporters to make tax-deductible contributions to their teams, in return for priority seats at football and basketball games. The provision has been credited with the financial boom in college sports. In a rush to limit the impact, athletic departments have been telling donors to prepay multiple years before Dec. 31 to retain the tax deduction.


University Endowments


About 30 colleges and universities, including Harvard, Yale and small liberal arts schools such as Amherst and Williams, may pay a 1.4 percent tax on their endowment investment returns. Schools that would be taxed have at least 500 students and more than $500,000 in endowment per student.


Colleges have widely opposed the bill, although the final version dropped a tax on graduate school tuition waivers that sparked an outcry.




Bid to collect internet sales tax gets U.S. Supreme Court review

By  Greg Stohr


The U.S. Supreme Court will consider freeing state and local governments to collect billions of dollars in sales taxes from online retailers, agreeing to revisit a 26-year-old ruling that has made much of the internet a tax-free zone.


Heeding calls from traditional retailers and dozens of states, the justices said they’ll hear South Dakota’s contention that the 1992 ruling is obsolete in the e-commerce era and should be overturned.


State and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales tax payments from online merchants and other remote sellers, according to a report from the Government Accountability Office, Congress’s non-partisan audit and research agency. Other estimates are even higher. All but five states impose sales taxes.


Online retailers Wayfair Inc., Inc. and Newegg Inc. are opposing South Dakota in the court fight. Each collects sales taxes from customers in only some states.


The case will also affect Inc., though the biggest online retailer isn’t directly involved. When selling its own inventory, Amazon charges sales tax in every state that imposes one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.


The court probably will hear arguments in April with a ruling by the end of its nine-month term in late June.


‘Physical Presence’


The high court’s 1992 Quill v. North Dakota ruling, which involved a mail-order company, said retailers can be forced to collect taxes only in states where the company has a “physical presence.” The court invoked the so-called dormant commerce clause, a judge-created legal doctrine that bars states from interfering with interstate commerce unless authorized by Congress.


South Dakota passed its law in 2016 with an eye toward overturning the Quill decision. It requires retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases. Soon after enacting the law, the state filed suit and asked the courts to declare the measure constitutional.


“States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike,” South Dakota said in its Supreme Court appeal.


Wayfair, Overstock and Newegg said the court should reject the appeal and leave it to Congress to set the rules for online taxes.


Expressing Doubts


“If Quill is overruled, the burdens will fall primarily on small and medium-size companies whose access to a national market will be stifled,” the companies argued. “Congress can address this issue in a balanced and comprehensive manner through legislation.”


Three current justices—Clarence Thomas, Neil Gorsuch and Anthony Kennedy—have expressed doubts about the Quill ruling. Kennedy said in 2015 that Quill had produced a “startling revenue shortfall” in many states, as well as “unfairness” to local retailers and their customers.


“A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier,” Kennedy wrote. “It should be left in place only if a powerful showing can be made that its rationale is still correct.”


Gorsuch, the newest Supreme Court justice, suggested skepticism about Quill as an appeals court judge. And Thomas has said he would jettison the entire dormant commerce clause, saying “it has no basis in the Constitution and has proved unworkable in practice.”


Amazon backs a nationwide approach that would relieve retailers from dealing with a patchwork of state laws. Amazon once relied on the Quill ruling and didn’t collect sales tax at all; the company gradually changed its position as it built warehouses all over the country, giving it a greater physical presence in multiple states.


The case is South Dakota v. Wayfair, 17-494.




How tax overhaul would change business taxes

By Alistair M. Nevius


The tax reform bill that Congress voted to approve Dec. 20 contains numerous changes that will affect businesses large and small. H.R. 1, known as the Tax Cuts and Jobs Act, would make sweeping modifications to the Internal Revenue Code, including a much lower corporate tax rate, changes to credits and deductions, and a move to a territorial system for corporations that have overseas earnings.


Here are many of the bill’s business provisions.


Corporate tax rate


The act replaced the prior-law graduated corporate tax rate, which taxed income over $10 million at 35%, with a flat rate of 21%. The House version of the bill had provided for a special 25% rate on personal service corporations, but that special rate did not appear in the final act. The new rate took effect Jan. 1, 2018.


Corporate AMT


The act repealed the corporate AMT.




Bonus depreciation: The act extended and modified bonus depreciation under Sec. 168(k), allowing businesses to immediately deduct 100% of the cost of eligible property in the year it is placed in service, through 2022. The amount of allowable bonus depreciation will then be phased down over four years: 80% will be allowed for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. (For certain property with long production periods, the above dates will be pushed out a year.)


The act also removed the rule that made bonus depreciation available only for new property.


Luxury automobile depreciation limits: The act increased the depreciation limits under Sec. 280F that apply to listed property. For passenger automobiles placed in service after 2017 and for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years.


Sec. 179 expensing: The act increased the maximum amount a taxpayer may expense under Sec. 179 to $1 million and increased the phaseout threshold to $2.5 million. These amounts will be indexed for inflation after 2018.


The act also expanded the definition of Sec. 179 property to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. It also expanded the definition of qualified real property eligible for Sec. 179 expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems.


Accounting methods


Cash method of accounting: The act expanded the list of taxpayers that are eligible to use the cash method of accounting by allowing taxpayers that have average annual gross receipts of $25 million or less in the three prior tax years to use the cash method. The $25 million gross-receipts threshold will be indexed for inflation after 2018. Under the provision, the cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross-receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor.


Farming C corporations (or farming partnerships with a C corporation partner) will be allowed to use the cash method if they meet the $25 million gross-receipts test.


The current-law exceptions from the use of the accrual method otherwise remain the same, so qualified personal service corporations, partnerships without C corporation partners, S corporations, and other passthrough entities continue to be allowed to use the cash method without regard to whether they meet the $25 million gross-receipts test, so long as the use of that method clearly reflects income.


Inventories: Taxpayers that meet the cash-method $25 million gross-receipts test will also not be required to account for inventories under Sec. 471. Instead, they will be allowed to use an accounting method that either treats inventories as nonincidental materials and supplies or conforms to their financial accounting treatment of inventories.


UNICAP: Taxpayers that meet the cash-method $25 million gross-receipts test are exempted from the uniform capitalization rules of Sec. 263A. (The exemptions from the UNICAP rules that are not based on gross receipts are retained in the law.)


Expenses and deductions


Interest deduction limitation: Under the act, the deduction for business interest is limited to the sum of (1) business interest income; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).


Any taxpayer that meets the $25 million gross-receipts test is exempt from the interest deduction limitation. The limitation will also not apply to any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Farming businesses are allowed to elect out of the limitation.


For these purposes, business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Business interest income means the amount of interest includible in the taxpayer’s gross income for the tax year that is properly allocable to a trade or business. However, business interest does not include investment interest, and business interest income does not include investment income, within the meaning of Sec. 163(d).


Floor plan financing interest means interest paid or accrued on indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired.


Net operating losses: The act limits the deduction for net operating losses (NOLs) to 80% of taxable income (determined without regard to the deduction) for losses. (Property and casualty insurance companies are exempt from this limitation.)


Taxpayers are allowed to carry NOLs forward indefinitely. The two-year carryback and special NOL carryback provisions were repealed. However, farming businesses are still allowed a two-year NOL carryback.


Like-kind exchanges: Under the act, like-kind exchanges under Sec. 1031 will be limited to exchanges of real property that is not primarily held for sale. This provision generally applies to exchanges completed after Dec. 31, 2017. However, an exception is provided for any exchange if the property disposed of by the taxpayer in the exchange was disposed of on or before Dec. 31, 2017, or the property received by the taxpayer in the exchange was received on or before that date.


Domestic production activities: The act repealed the Sec. 199 domestic production activities deduction.


Entertainment expenses: The act disallows a deduction for (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes; or (3) a facility or portion thereof used in connection with any of the above items.


Qualified transportation fringe benefits: The act disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer and, except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.


Meals: Under the act, taxpayers are still generally able to deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after Dec. 31, 2017, and until Dec. 31, 2025, the act expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025, will not be deductible.


Partnership technical terminations: The act repealed the Sec. 708(b)(1)(B) rule providing for technical terminations of partnerships under specified circumstances. The provision does not change the rule of Sec. 708(b)(1)(A) that a partnership is considered to be terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.


Carried interests: The act provides for a three-year holding period in the case of certain net long-term capital gain with respect to any applicable partnership interest held by the taxpayer. It treats as short-term capital gain taxed at ordinary income rates the amount of a taxpayer’s net long-term capital gain with respect to an applicable partnership interest if the partnership interest has been held for less than three years.


The conference report for the act clarified that the three-year holding requirement applies notwithstanding the rules of Sec. 83 or any election in effect under Sec. 83(b).


Amortization of research and experimental expenditures: Under the act, amounts defined as specified research or experimental expenditures must be capitalized and amortized ratably over a five-year period. Specified research or experimental expenditures that are attributable to research that is conducted outside of the United States must be capitalized and amortized ratably over a 15-year period.


Year of inclusion: The act requires accrual-method taxpayers subject to the all-events test to recognize items of gross income for tax purposes in the year in which they recognize the income on their applicable financial statement (or another financial statement under rules to be specified by the IRS). The act provides an exception for taxpayers without an applicable or other specified financial statement.


Business credits

The act modified a number of credits available to businesses. The House version of the act would have repealed a large number of business credits, but the final act generally did not repeal those credits. Changes to business credits in the final act include:


Orphan drug credit: The amount of the Sec. 45C credit for clinical testing expenses for drugs for rare diseases or conditions is reduced to 25% (from the prior 50%).


Rehabilitation credit: The act modified the Sec. 47 rehabilitation credit to repeal the 10% credit for pre-1936 buildings and retain the 20% credit for certified historic structures. However, the credit must be claimed over a five-year period.


Employer credit for paid family or medical leave: The act allows eligible employers to claim a credit equal to 12.5% of the amount of wages paid to a qualifying employee during any period in which the employee is on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account for any employee in any tax year is 12 weeks. However, the credit is only available in 2018 and 2019.




Covered employees: Sec. 162(m) limits the deductibility of compensation paid to certain covered employees of publicly traded corporations. Prior law defined a covered employee as the chief executive officer and the four most highly compensated officers (other than the CEO). The act revised the definition of a covered employee under Sec. 162(m) to include both the principal executive officer and the principal financial officer and reduced the number of other officers included to the three most highly compensated officers for the tax year. The act also requires that if an individual is a covered employee for any tax year (after 2016), that individual will remain a covered employee for all future years. The act also removed prior-law exceptions for commissions and performance-based compensation.


The act includes a transition rule so that the changes do not apply to any remuneration under a written binding contract that was in effect on Nov. 2, 2017, and that was not later modified in any material respect.


Qualified equity grants: The act allows a qualified employee to elect to defer, for income tax purposes, the inclusion in income of the amount of income attributable to qualified stock transferred to the employee by the employer. An election to defer income inclusion for qualified stock must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier.


Taxation of foreign income

The act provides a 100% deduction for the foreign-source portion of dividends received from “specified 10% owned foreign corporations” by domestic corporations that are U.S. shareholders of those foreign corporations within the meaning of Sec. 951(b). The conference report says that the term “dividend received” is intended to be interpreted broadly, consistently with the meaning of the phrases “amount received as dividends” and “dividends received” under Secs. 243 and 245, respectively.


A specified 10%-owned foreign corporation is any foreign corporation (other than a passive foreign investment company (PFIC) that is not also a controlled foreign corporation (CFC)) with respect to which any domestic corporation is a U.S. shareholder.


The deduction is not available for any dividend received by a U.S. shareholder from a CFC if the dividend is a hybrid dividend. A hybrid dividend is an amount received from a CFC for which a deduction would be allowed under this provision and for which the specified 10%-owned foreign corporation received a deduction (or other tax benefit) from any income, war profits, and excess profits taxes imposed by a foreign country.


Foreign tax credit: No foreign tax credit or deduction will be allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction.


Holding period: A domestic corporation will not be permitted a deduction for any dividend on any share of stock that is held by the domestic corporation for 365 days or less during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the dividend.


Deemed repatriation: The act generally requires that, for the last tax year beginning before Jan. 1, 2018, any U.S. shareholder of a specified foreign corporation must include in income its pro rata share of the accumulated post-1986 deferred foreign income of the corporation. For purposes of this provision, a specified foreign corporation is any foreign corporation in which a U.S. person owns a 10% voting interest. It excludes PFICs that are not also CFCs.


A portion of that pro rata share of foreign earnings is deductible; the amount of the deductible portion depends on whether the deferred earnings are held in cash or other assets. The deduction results in a reduced rate of tax on income from the required inclusion of preeffective date earnings. The reduced rate of tax is 15.5% for cash and cash equivalents and 8% for all other earnings. A corresponding portion of the credit for foreign taxes is disallowed, thus limiting the credit to the taxable portion of the included income. The separate foreign tax credit limitation rules of current-law Sec. 904 apply, with coordinating rules. The increased tax liability generally may be paid over an eight-year period. Special rules are provided for S corporations and real estate investment trusts (REITs).


Foreign intangible income: The act provides domestic C corporations (that are not regulated investment companies or REITs) with a reduced tax rate on “foreign-derived intangible income” (FDII) and “global intangible low-taxed income” (GILTI). FDII is the portion of a domestic corporation’s intangible income that is derived from serving foreign markets, using a formula in a new Sec. 250. GILTI would be defined in a new Sec. 951A.


The effective tax rate on FDII will be 13.125% in tax years beginning after 2017 and before 2026 and 16.406% after 2025. The effective tax rate on GILTI will be 10.5% in tax years beginning after 2017 and before 2026 and 13.125% after 2025.


Definition of U.S. shareholder: The act amended the ownership attribution rules of Sec. 958(b) to expand the definition of “U.S. shareholder” to include a U.S. person who owns at least 10% of the value of the shares of the foreign corporation.


— Alistair M. Nevius ( is the Journal of Accountancy’s editor-in-chief, tax.




The Accountants’ Full Employment Act?

By  Roger Russell


Among CPAs, it’s common to hear a major piece of tax legislation called “The Accountants’ Full Employment Act” -- and the Tax Cuts and Jobs Act is no different.


Having passed in the Senate in the early hours of Wednesday, and with only a purely procedural second vote in the House due Wednesday morning, the legislation was originally aimed at simplification, but will, in fact, leave many taxpayers more in need of expert advice than ever.


“Most tax bills do provide additional business to accountants because of the planning work that is required,” said Steve Danner, a tax partner in the South Florida practice of Cherry Bekaert. “The new law contains some very complex provisions that will require additional work in determining what is the best course of action for our clients.”


“There are a lot of moving parts, so it has never been a more important time for taxpayers to get with their accountants and model out scenarios of options this year versus next year,” said Bill Smith, managing director of the National Tax Office at CBIZ MHM.


Tax reform will bring plenty of the kinds of changes that call for professional tax advice, according to Jeffrey LeSage, Americas vice chairman of tax at Big Four firm KPMG LLP. “A new code will mean not only new regulations, but also new approaches to tax planning, new compliance and reporting standards, and changes to integration with international and state and local taxation,” he said.


“Companies will need to move quickly to respond to the vast changes expected in the Tax Code and the layers of new rules that will become effective at different times,” he added. “Of particular importance, if the bill is enacted before year-end, calendar-year companies will need to reflect it in fourth quarter and year-end financial statements.”


Jamie Fowler, national managing partner for Tax Services at Grant Thornton, agreed. “The corporate rate cut would require the recalculation of all tax attributes for financial statement purposes. If the bill is signed before the end of the year, this is a huge undertaking that needs immediate attention,” she said.


And doubtless, a technical corrections bill will follow on the heels of the TCJA. “There will be technical corrections -- a lot of them – on the bill,” said Stuart Gibson, counsel at Schiff Hardin in Washington, D.C., and former senior litigator in the Tax Division of the Department of Justice. “There’s no way they’ve got everything right. They drafted this on the fly.”


“The conference bill lets Trump keep his “Two for One” executive order, [two regulations must be removed for every new regulation that is added],” Gibson observed. “One reason they got rid of all of the deductions on the individual side is to free up space. To comply with the two regs out for each new reg, all the rules around individual deductions will go away. The IRS will need to issue new regs around specific issues.”


Just to learn the provisions of a technical corrections bill or study the regulations will take effort and create work for accountants. While it is normal for a major tax bill to beget a technical corrections act, the speed with which this one was drafted, plus the last-minute changes, almost certainly will require voluminous legislative language to correct its mistakes. And although the IRS may comply with the Trump two-for-one mandate, expect the regulations explaining the law’s provisions to be long and detailed.


And it may take a while for any technical corrections bill to be passed, according to Roger Harris, president of Padgett Business Services.


“When you have huge pieces of legislation you expect a technical corrections act to come back and fix things,” he said. “But with bills so political – the Democrats on health care, and the Republicans on tax reform – it’s harder to get those done. They want to leave the other part hanging out there with the problem.”


First things first


The IRS will have its hands full just deciding which provisions require new regulations first, noted Jim Brandenburg, tax partner at Sikich LLP. “They will need to get guidance out for practitioners as well as businesses very soon. They may issue some guidance in the form of Q&As rather than full-blown regs, at least at the beginning. And transition provisions and effective dates will add tremendous complexity.”


One upside of the act is that it is mostly forward-looking, so it won’t unduly affect the upcoming tax season, according to Cherry Bekaert’s Danner: “The effect on the upcoming tax season will not be significant as almost all of the provisions are effective in 2018. Those provisions that are effective beginning in 2017 will require additional work.”


That said, he did have some strategies for whenever the bill finally passes: “I will tell clients to pay any 2017 state income taxes before the year end and pay any real estate taxes now if they were planning put it off until 2018.”


Tom Wheelwright, founder and chief executive of accounting firm ProVision, has already prepared a revised checklist of things to suggest clients do by year’s end:


  • Prepay 2017 state income taxes.
  • Accelerate any of your children’s unearned income into 2017 (rates go up in 2018).
  • Push business income to 2018 (rates go down in 2018, plus deduction).
  • Buy and place in service an electric car (tax credit expires at end of 2017).
  • Recognize any possible business losses (they will be limited in 2018).
  • Prepay investment expenses and tax prep fees in 2017 (nondeductible in 2018).
  • Pay any moving expenses related to a job in 2017 (the deduction is eliminated in 2018).
  • Sell any business processes or patents before the end of the year (this will be treated as ordinary income in 2018, and is capital gains in 2017).
  • Wait to buy a business vehicle until 2018 (depreciation on luxury autos goes up substantially in 2018).


Ed Mendlowitz, a partner at WithumSmith+Brown, noted the many changes and complexities the act creates in business taxation, and warned practitioners to study up on the new rules. “They’re making a major change, a real change,” he said. “They actually discriminated against different types of businesses.”


In particular, he pointed out that service businesses like accounting firms may suffer some adverse effects: “They separated heavily capital-intensive businesses from businesses that are service businesses. They ignore that services employ working capital. Capital can be employed in the form of inventory. Service businesses are investing heavily in artificial intelligence. My firm has a very large investment in artificial intelligence. They’re ignoring that service businesses are doing that. They’re ignoring that service businesses are growing. Those growing businesses need capital in the business just to fund growth. A service business needs to buy real estate. If you’re an accounting firm or an architecture firm you have to spend a lot of money building offices. These are issues that are going to be coming.”


“One issue, of course, is for businesses to take advantage of the full expensing by buying and placing tangible assets in service by Dec. 31 to take advantage of the higher entity and pass-through effective rates this year (the provision applies for assets after Sept. 27),” CBIZ MHM’s Smith. “Another is to be wary of advisors advocating paying 2018 state income taxes in 2017, as the committee report expressly killed that option.”


John Karaffa, whose practice is limited solely to professional athletes, says that most athletes will benefit from lower tax rates, but if they live in a high-tax state they will be paying more overall. “It’s too much to make up, even with the lower federal rate,” he said.


He is advising his clients to prepay a number of items before the end of the year. These include agent fees, personal assistant fees, business manage fees, training expenses, state and real estate taxes, financial advisor fees, charitable donations, and tax preparation fees.


Both Wheelwright and Karaffa suggest advising clients on the benefits of doing business as a C corporation.


This makes sense, according to Grant Thornton’s Fowler. “Corporations are set to get much better rate relief than pass-through businesses like partnerships and S corporations,” she said. “Many pass-throughs will need to assess whether it would be beneficial to convert. However, this is not an easy analysis. It depends on many factors, including whether owners work in the business, how much earnings are distributed, and any succession plans.”


Michael Cohn and Daniel Hood contributed to this article.




Tax reform will deliver a corporate earnings gusher

By  Justin Fox


The tax bill that President Donald Trump signed into law last week is going to generate some really strange numbers in the next round of corporate earnings reports.


You may have already heard about the negative numbers: Financial institutions and other companies that had near-death experiences during the financial crisis are going to have to take big charges against earnings as the value of their "deferred tax assets" -- past losses that can be used to defray future tax bills -- goes down with the corporate tax rate. That rate is being reduced to 21 percent from 35 percent, which, all else being equal, amounts to about a 40 percent tax cut.

Citigroup Inc., which has by far the biggest pile of deferred U.S. tax assets, at $43 billion, has estimated that it will have to take a $20 billion earnings charge. Fannie Mae and Freddie Mac, which normally hand all their earnings over to the Treasury Department, have cut a deal to retain $3 billion each in order to cover the tax-asset-related losses they expect to face. Other big losers, according to a handy roundup assembled last week by MarketWatch's Francine McKenna, include General Motors Co., American International Group Inc., Bank of America Corp. and Ford Motor Co.


But most big corporations don't have giant piles of deferred tax assets. They're far more likely to have giant piles of deferred tax liabilities -- which means that the new tax law will, along with cutting their taxes going forward, deliver a big one-time boost to 2017 earnings as the lower corporate tax rate shrinks the value of those liabilities. Of the 200 largest U.S. corporations, ranked by market cap, only five have net deferred tax assets of more than $5 billion. Twenty-eight have net deferred tax liabilities bigger than that. Here are the 15 with the biggest deferred tax liabilities:


A list of the 15 with the biggest deferred tax liabilities is heavy on industries that do a lot of capital spending. As Stephen Foley wrote two years ago in the Financial Times: “The U.S. Tax Code encourages capital investment through the way it treats the depreciation of assets such as power plants and rail infrastructure, allowing companies to record profits that are not taxed until later in the life of these assets. Congress expanded these incentives for business investment in the wake of the financial crisis.”


That was in an article about Warren Buffett's Berkshire Hathaway Inc., which seemed to make deferring taxes a top priority in recent years as it bought into the capex-intensive railroad and utility industries. It's impossible to know exactly how these deferred tax assets will convert into earnings gains from the tax bill, in part because some of them concern taxes outside the U.S. Miller, an emeritus accounting professor at the University of Colorado at Colorado Springs who together with frequent collaborator Paul Bahnson of Boise State University alerted me to this strange phenomenon, e-mailed an abbreviated rundown of the possible impact on Exxon Mobil Corp.'s earnings: “As of 9/30, DTL = $34+ billion, and nine months earnings = $11+ billion; project savings from tax cut at 40% x $34 billion, and you get about $14 billion; project 12 months earnings at about $15 billion without tax, and the reported annual earnings jumps to $29 billion for the year, even before the law technically takes effect as of 1/1/18.”


That's earnings according to GAAP. As my Bloomberg View colleague Matt Levine wrote last spring when people first started discussing the prospect of banks taking big earnings hits from the tax bill: “Next time someone complains that companies that report non-GAAP earnings are using ‘fantasy numbers,’ let's all remember that GAAP would require Citigroup and Bank of America to report billions of dollars of losses solely because they will pay lower taxes in the future. Under this tax plan, Citi and BofA would have the same amount of money now, and more money in the future, but under U.S. generally accepted accounting principles they would have to report a huge loss anyway. Presumably shareholders would also be interested in the pro forma non-GAAP numbers excluding that loss.”


For the companies that have big deferred tax liabilities, GAAP's verdict is less perverse: They'll report higher earnings now, and higher earnings in the future. It's still misleading, though. Financial markets will probably see their way around the distortions when Exxon Mobil, Berkshire Hathaway, AT&T Inc., Comcast Corp. and the like report spectacular 2017 earnings in late January and early February. But I imagine that headlines like "Tax Bill Delivers $14 Billion Exxon Mobil Windfall" are going to generate a lot of negative public sentiment about the already unpopular tax law. Which is one reason we probably haven't heard the last of those corporate announcements about across-the-board bonus payments to employees.


Miller thinks there's actually a pretty simple accounting fix to all of this: “The solution, of course, is to report tax expense = taxes paid or shortly payable and then disclose future benefits or payments without recognizing assets or liabilities.”

That's not going to happen anytime soon, though. So brace yourself for a very weird earnings season.




IRS Extends Due Date for Employers and Providers to Issue Health Coverage Forms to Individuals in 2018


WASHINGTON ― The IRS announced today that it has extended the 2018 due date for certain entities to provide 2017 health coverage information forms to individuals.
Insurers, self-insuring employers, other coverage providers, and applicable large employers now have until March 2, 2018, to provide Forms 1095-B or 1095-C to individuals, which is a 30-day extension from the original due date of Jan. 31.

Insurers, self-insuring employers, other coverage providers, and applicable large employers must furnish statements to employees or covered individuals regarding the health care coverage offered to them. Individuals may use this information to determine whether, for each month of the calendar year, they may claim the premium tax credit on their individual income tax returns.

This 30-day extension is automatic. Employers and providers don’t have to request it. The due dates for filing 2017 information returns with the IRS are not extended. For 2018, the due dates to file information returns with the IRS are:


  • Feb. 28 for paper filers
  • April 2 for electronic filers

Because of these extensions, individuals may not receive their Forms 1095-B or 1095-C by the time they are ready to file their 2017 individual income tax return. While information on these forms may assist in preparing a return, the forms are not required to file. Taxpayers can prepare and file their returns using other information about their health coverage. They do not have to wait for Forms 1095-B or 1095-C to file.


More information is contained in Notice 2018-06. Also visit for more.





What You Should Know About Taxation Of Cryptocurrencies

Adam Bergman , Contributor


If you spend or invest in virtual currencies, it is crucial to understand how virtual currency transactions are treated for tax purposes.


IRS Notice 2014-21

The IRS addressed the taxation of virtual currency transactions in Notice 2014-21. According to the Notice, virtual currency is treated as property for federal tax purposes. This means that, depending on the taxpayer's circumstances, cryptocurrencies, such as Bitcoin, can be classified as business property, investment property, or personal property. General tax principles applicable to property transactions must be applied to exchanges of cryptocurrencies. Hence, Notice 2014-21 holds that taxpayers recognize gain or loss on the exchange of cryptocurrency for other property.  Accordingly, gain or loss is recognized every time that Bitcoin is used to purchase goods or services.


Determining Basis & Gain

When it comes to determining the taxation of cryptocurrency transactions, it is important for cryptocurrency owners to properly track basis. Basis is generally defined as the price the taxpayer paid for the cryptocurrency asset.


For example, on June 1 2017, Jane purchased five Bitcoins for $6,000 ($1,200 each Bitcoin). On November 1, 2017, she used one Bitcoin to purchase $2,000 worth of merchandise via an online retailer. Jane recognized an $800 gain on the transaction ($2,000 amount realized - $1,200 basis in one Bitcoin).


Treating cryptocurrency, such as Bitcoin, as property creates a potential accounting challenge for taxpayers who use it for everyday purchases because a taxable transaction occurs every time that a cryptocurrency is exchanged for goods or services. For example, if Jane purchased a slice of pizza with one Bitcoin that she purchased on June 1 2017, she would have to determine the basis of the Bitcoin and then subtract that by the cost of the slice of pizza to determine if any gain was recognized. There is currently no “de minimis” exception to this gain or loss recognition. Taxpayers must track their cryptocurrency basis continuously to report the gain or loss recognized on each crypto transaction properly. It is easy to see how this treatment can cause accounting issues with respect to everyday cryptocurrency transactions.


On the other hand, the loss recognition on cryptocurrency transactions is equally complex. A deduction is allowed only for losses incurred in a trade or business or on a transaction entered into for profit. If Jane had recognized a $100 loss on her purchase of merchandise from the online retailer, the loss may not be deductible. If Jane uses Bitcoin for everyday transactions and does not hold it for investment, her loss is a nondeductible personal loss. However, if she holds Bitcoin for investment and cashes out of her investment by using Bitcoin to purchase merchandise, her loss is a deductible investment loss. Whether Bitcoin is held for investment or personal purposes may be difficult to determine, and further guidance by the IRS on this topic is needed.


Cryptocurrency values have been extremely volatile since its inception. As illustrated below, this volatility makes a significant difference in gain or loss recognition.


Jane purchased four Bitcoins on February 2, 2017 for $1,120 per Bitcoin, ten Ethereum coins on March 10, 2017 for $320 per coin, and 65 Litecoins on July 5, 2017 for $65 per coin.  Jane would need to keep track of the basis and sales price for each cryptocurrency transaction in order to properly calculate the gain or loss for each transaction.  In addition, if Jane purchased Bitcoins at different dates and at different prices, at sale, Jane would have to determine whether she would be selling a specific Bitcoin or use the first-in, first-out (FIFO) method to determine any potential gain or loss. The default rule for tracking basis in securities is FIFO. Taxpayers can also determine basis in securities by using the last-in, first out (LIFO), average cost, or specific identification methods. The prevalent thought is that these methods should be available for property that does not qualify as a security, and that taxpayers investing in cryptocurrency should use the method that is most beneficial to them. However, no direct IRS authority supports this position.


In sum, taxpayers must track their cryptocurrency purchases carefully. Each cryptocurrency purchase should be kept in a separate online wallet and appropriate records should be maintained to document when the wallet was established. If a taxpayer uses an account with several different wallet addresses and that account is later combined into a single wallet, it may become difficult to determine the original basis of each cryptocurrency that is used in a subsequent transaction.

The details of all cryptocurrency transactions in a network are stored in a public ledger called a “Blockchain,” which permanently records all transactions to and from online wallet addresses, including date and time. Taxpayers can use this information to determine their basis and holding period. Technology to assist taxpayers in this process is being developed currently and some helpful online tools are now available.


Characterization of Gain or Loss for Cryptocurrency Transactions

The character of gain or loss on a cryptocurrency transaction depends on whether the cryptocurrency is a capital asset in the taxpayer's hands. Gain on the sale of a cryptocurrency that qualifies as a capital asset is netted with other capital gains and losses. A net long-term capital gain that includes gain on crypto transactions is eligible for the preferential tax rates on long-term capital gains, which is 15% or 20% for high net-worth taxpayers. Cryptocurrency gain constitutes unearned income for purposes of the unearned income Medicare contributions tax introduced as part of the Affordable Care Act. As a result, taxpayers with modified adjusted gross incomes over $200,000 ($250,000 for married taxpayers filing jointly) are subject to an additional 3.8% tax on cryptocurrency gain.


For example, on August 1, 2017, Jen, a sole proprietor, digitally accepts two Bitcoins from Steve as payment for services. On that date, Bitcoins are worth $10,000 each, as listed by Coinbase. Therefore, Jen recognizes $20,000 ($10,000 x 2) of business income. A month later, when Bitcoins are trading for $11,500 on the Coinbase exchange, Jen uses two Bitcoins to purchase supplies for her business. At that time, Jen will recognize $23,000 ($11,500 x 2) in business expense and $3,000 [($11,500 - $10,000) x 2] of gain due to the Bitcoin exchange. Since Jen isn't in the trade or business of selling Bitcoins, the $3,000 gain is capital in nature.


Now let’s assume the same facts as above, except that Jen uses the two Bitcoins to purchase a new car for her personal use. According to the Coinbase exchange, Bitcoins are now trading at $8000. Jen will realize a loss of $4000 [($8000 - $10,000) x 2]. However, this loss is considered a nondeductible capital loss because Jen didn't use the Bitcoins for investment or business purposes.  It is important to note that a payment using cryptocurrencies are subject to information reporting to the same extent as any other payment made in property. Thus, a person who, in the course of a trade or business, makes a payment using cryptocurrency with a fair market value of $600 or more is required to report the payment to the IRS and the payee’s cryptocurrency payments are subject to backup withholding. This means that persons making reportable payments with cryptocurrency must solicit a Taxpayer Identification Number (TIN) from the payee. If a TIN isn't obtained prior to payment, or if a notification is received from the IRS that backup withholding is required, the payer must backup withhold from the virtual currency payment.




How to Tell if You Need a New iPhone Battery

ByEric Griffith


If your iPhone seems slow, but you’re not sure if it’s slow enough to warrant an upgrade, these steps may help you decide.


If you have a new iPhone (iPhone 8, 8 Plus, or the much hyped iPhone X), battery problems are the last thing on your mind. But for those with older iPhones, it's probably top of mind—especially after Apple admitted to secretly slowing down batteries and is now offering $29 replacements until Dec. 31, 2018.


Battery slowdowns on aging phones are nothing new; lithium-ion batteries are the best option we have for mobile tech today, but they're far from perfect. The more power cycles they go through, the worse their capacity gets.


Apple's "fix" is why many people with older iPhones report battery problems whenever a new version of iOS comes out. It's not just that iOS is written for new devices and runs slower on old models (though that's certainly part of it). It's that Apple, in its infinite wisdom, actually cripples older phones in the name of "overall performance and prolonging the life of...devices."


It's maddening. But Apple got caught when some older iPhones improved after new batteries were installed and people went public with it on Reddit. Weeks later, the company is being sued, and the battery replacement is its public relations response.

The $29 battery replacement only applies to iPhone SE, 6, 6 Plus, 6s, 6s Plus, 7, and 7 Plus. Older phones have to be covered by AppleCare or the battery replacement still costs $79—except if the battery is less than 80 percent capacity when fully charged, in which case the AppleCare battery swap is free.


To get your new battery, take an iPhone to the Apple Store's Genius Bar or mail it in. But what if you're on the fence about your own iPhone's battery? How do you tell if its capacity is low and it's gone through 500 charge cycles—Apple's somewhat arbitrary number for what it considers the lifespan of an iPhone battery?


In other words: how do you tell if you need a replacement battery?


Check Wear With an App

The easiest thing to do is download an app like Battery Life (there are multiple apps with that name, but this version, by RBT Digital, seems to be the most robust).


The first thing the app will do is display a giant front page graph showing battery wear level. Here are three versions you can compare. The first one is on a 2-year-old iPhone 6s Plus; the second is a smaller iPhone 6s purchased a year ago; the third is an iPhone X that's barely a week old. level is the battery's capacity to hold a charge compared to its capacity when brand new. For example, an iPhone X comes with a battery (the X actually has two batteries inside) with a total capacity of 2,716 milliamps per hour (mAh); according to the Battery Life app, it still has that full capacity. However, the iPhone 6s Plus has a battery that was originally capable of 2,725 mAh, but now can only hold 2,300 mAh, or 84 percent of what it once could handle.

The more you check this app, the more history it keeps, so you can check to see as your iPhone battery capacity decreases over time. That happens after more and more charge cycles are used.


A charge cycle happens every time you discharge 100 percent of a battery's capacity. That doesn't have to be all the way down to 0. If you keep your phone charged to 80 percent, then use it down to 30 percent, and do that twice in a day—using that 50 percent twice is a full charge cycle.


Apple says its batteries are good for 400 to 500 charge cycles. That usually takes a year or two—or around the time you'd upgrade iOS and see it all slow down when the new iOS detects an aging battery and reduces processor output to "help" you. It doesn't hurt that Apple would also prefer you purchase a new phone around that time, too.


No app lets you see how many charge cycles you've used on an iPhone. (Unless you jailbreak your iPhone.) Maybe that'll change in 2018. Apple is promising an iOS upgrade that will "give users more visibility into the health of their iPhone's battery, so they can see for themselves if its condition is affecting performance." Until then, the only way to actually check the charge cycle usage of an iPhone is with...a computer.


Check Charge Cycles on a PC


It might seem counterintuitive to require a laptop or desktop PC to check how many times you've used a charge cycle on your iPhone's battery, but alas, those are Apple's rules.


Previously, whenever developers tried to release an app that measured iPhone battery charge cycles, Apple pulled it from the App Store. With iOS 10, Apple then pulled info on charge cycles as well as battery temperatures so third-party apps like Battery Life could not get to them. Let's hear it for transparency!


However, there are some desktop programs to get you through.

On a Mac, download coconutBattery, which will also tell you all about the health of your Mac's battery.


Plug your iPhone into the Mac via the USB-to-Lightning cable, then turn on coconutBattery to get a reading on the iOS Device tab. Under the charge capacity graphs, you'll see a listing that says "Cycle Count" so you can tell how far you are from that dreaded 500. If you pay to get coconutBattery Plus for $9.95, you can monitor all this info over Wi-Fi on your Mac without plugging the iPhone in via USB.


It works on iPads as well but iPads aren't getting slowed down by iOS, even if they're older.


Windows users should turn to iBackupBot; it works on Windows 7, 8, and 10 and costs $35 after a 7-day free trial. It's ostensibly for backing up all sorts of info off an iOS device to your PC, but when you plug in an iPhone to the PC and run iBackupBot and build a phone profile, you can also access a section called More Information that clearly shows a "CycleCount" under the battery section (as well as the original DesignCapacity and current FullChargeCapacity of the battery.)


HowToGeek reports that you can also contact Apple via their support website, give them remote control of your iPhone, and they'll reveal the battery's health (albeit without specific numbers). Whether you trust that from the company that just admitted to crippling CPUs just because batteries get old is up to you.


When Should I Get a New iPhone Battery?


Now that you're armed with the info needed to measure capacity and even charge cycles, you've got to decide when to get that new battery.


How to Get Your $29 iPhone Battery Replacement

Here's what I'd suggest: if you've got anything older than an iPhone 7, get the $29 battery change next time you're anywhere near an Apple Store. It's the cost of a few venti hot chocolates, and worth it to give those older iPhones another year of decent performance.


If you've got an iPhone 7 or newer, check the Battery Life app infrequently and see where things are headed. If your iPhone battery is headed to just 80 percent then look into the replacement options stat, hopefully before Apple's battery deal runs out at the end of the year. (Remember, if you have AppleCare and your battery goes below 80 percent capacity, they'll replace it free, or maybe give you a replacement iPhone equivalent if anything else has gone awry.)


Or, buy the battery replacement kit from iFixit and do it yourself. It also costs $29, but will be available after Dec. 31. And it works on older iPhones, but not iPhone 8, 8 Plus, or X. The downside is you have to open the iPhone up yourself.




The gig is up: Clients with side jobs often neglect taxes

By  Jeff Stimpson


With the number of taxpayers working in the so-called “gig economy” rising relentlessly, it’s more likely than ever that a client is holding down a side job for extra cash, to transition into a new career, or for some other hope-filled purpose. What they are they less likely to do, though, is pay attention to the tax ramifications.


“Small-business owners must be disciplined to pay estimated quarterly taxes,” said Gail Rosen, a shareholder and CPA at Wilkin & Guttenplan in Martinsville, N.J., and “make sure that the bookkeeping is in order so [they] don’t miss business expenses.”


“They usually don’t set aside enough cash to pay the tax bill, which includes not only the income tax but also the SE tax,” said Scott Kadrlik, a CPA with Meuwissen, Flygare, Kadrlik and Associates, in Eden Prairie, Minn.


“There may not be a future for W-2s, just 1099s,” said Larry Pon, a CPA in Redwood City, Calif.

Plethora of issues

If your client is employed at a company and has work on the side, “a plethora of issues and concerns” arise, according to Pon:


  • Does the employer prohibit outside work? “I’ve seen employment contracts that expect you to devote 100-percent-plus of your attention to the employer,” he said. “It doesn’t matter if the side work is in the same business or not.” Pon’s example: the IRS itself. “You can have part-time jobs outside of your work hours [but] you cannot have a tax-preparation business.”
  • Is the client using their employer’s resources to do side work? Are they doing the work during business hours? Are they also trying to deduct the office computer? Are they using the employer-provided cell phone?
  • How much income is the side gig generating? Do they need to consider paying estimated taxes? Do they need to pay local business taxes?

Kelly Phillips Erb, who blogs as “Tax Girl” on, reports that according to a recent survey more than a quarter of Americans earn cash on the side but don’t declare it. “In terms of dollars,” writes Erb, “about 69.8 million Americans are failing to report an estimated $214.6 billion to the IRS each year. The biggest offenders? Millennials, according to the survey.” Survey results also indicate that more than a third of those earning incomes of $150,000 to $300,000 make money on the side without claiming it, more any other income bracket.

‘Sloppy’ or ‘valuable?’


Not all side-hustlers are the same. “If it’s self-employment, they could have a significant tax burden at the end of the year if they aren’t doing estimates. If it’s a W-2 employer, it’s common to under-withhold on a second job,” said Laurie Ziegler at Sass Accounting, in Saukville, Wis.


“Clients, especially those who come from a more traditional wage-earner background, don’t realize the importance of recordkeeping and keeping track of their income and expenses,” said Phyllis Jo Kubey, an Enrolled Agent in New York. “Often we find out about the new venture after the fact and have a major reconstruction project to correctly report the year’s activity.”


Quarterly estimated tax payments are also a foreign concept to many taxpayers who have never been self-employed, “and this can be particularly challenging for taxpayers with erratic cash flow,” Kubey said.


“I have one client who does a legitimate personal service, a side business, as she’s retired. I dread her lack of recordkeeping and ability to separate expenses for the business from personal use,” said Morris Armstrong, an EA and registered investment advisor at Armstrong Financial Strategies in Cheshire, Conn.


“I do look at her business bank statements and, fortunately, there aren’t that many transactions. She operates alone so there are no payroll issues and, yes, her regular tax records are as sloppy,” Armstrong said. “Some people just can’t maintain records or, conversely, keep each and every single piece of paper, valuable or worthless.”

One big question

EA Manasa Nadig, owner of MN Tax and Business Services and a partner at Harris Nadig, in Canton, Mich., has found that most people think if they didn’t receive a 1099-K from side-job platforms, income from that job is tax-free. “Not generally known is that a 1099-K is issued only when sellers exceed $20,000 in gross sales and the total number of transactions exceed 200,” Nadig said. Other trouble spots she’s seen include income and expenses bookkeeping – especially with AirBnB renters with the days rented – and payments of sales tax.


“Probably the single biggest concern to me is whether the side job is really a job and not a hobby, especially if you are talking about filing as sole proprietor,” said Jeff Gentner, an EA in Amherst, N.Y. “If the moonlighting or side hustle is a W-2 situation, then I try my best to make sure they have the proper withholding to cover their tax liability,” he said. “I review and complete the W-4 with them. Many times, at tax preparation time, these smaller W-2s affect the tax liability unfavorably when compared to the withholding.”


“Creating a hobby loss is not a great way of saving taxes, [as the] IRS will cause a lot of grief,” said Brian Stoner, a CPA in Burbank, Calif. “I always get a complete explanation of the side business from the client. Then we discuss what expenses are actually justified for this enterprise and how the client plans to expand the business to avoid hobby loss issues going forward.”




New Tax Law Takes Aim At Higher Education’s Millionaires Club

By Paul Caron


Chronicle of Higher Education, New Tax Law Takes Aim at Higher Education’s Millionaires Club:

[The new tax law imposes] a 21-percent tax on annual compensation in excess of $1 million paid to the five highest-paid employees of a nonprofit group — including college presidents, chancellors, and coaches. For medical professionals, however, compensation that is directly related to medical or veterinary services would not be taken into account. ...


According to an analysis by The Chronicle, America’s private, nonprofit colleges had 158 million-dollar employees in the 2015 calendar year, excluding medical staff members. The highest earners primarily included chief executives, athletics staff members, and investment officers. Mike Krzyzewski, head coach of the men’s basketball team at Duke University, topped the list, earning $7.4 million in 2015.


The Chronicle’s analysis is based on the latest available Form 990s of the 500 private, nonprofit colleges with the largest endowments. Reportable taxable compensation is the sum of base salaries, bonuses, and other compensation paid to employees by the institution and its related organizations. It remains to be seen whether the IRS will use the same Form 990s to levy this new tax.




What Losing Federal Personal and Dependency Exemptions Does to Michigan (and Other) Taxpayers

Last week, in So What About Those State Taxes? Surprise?, I pointed out that “The recently enacted federal tax legislation not only affects federal income tax liability but also changes state income tax liability for most taxpayers living or working in states with an income tax,” because “Most state income taxes are linked in some way to the federal income tax system.”

A reader pointed me to a Detroit Free Press article explaining that the changes to federal income tax law will increase state income tax liabilities for Michigan taxpayers by $1.4 billion. The principal reason for this impact is the loss of federal personal and dependency exemptions in the federal income tax law. Under current Michigan income tax law, the computation of Michigan taxable income begins with federal adjusted gross income, is increased and decreased by a variety of adjustments, and is decreased by $4,000 for each personal and dependency exemption claimed on the taxpayer’s federal income tax return, as illustrated by the Michigan income tax form.

Of course, this last-minute development has caused Michigan politicians to examine and discuss what to do about the situation. Many suggest doing something to prevent this outcome, including enacting a Michigan exemption not tied to the federal income tax system. Others want to lower the rate, but face opposition from advocates for higher tax relief for the poor and middle class. Still others want the state to let its tax revenue increase, because they predict that it will be needed to offset expected cuts in direct and indirect federal financial assistance to states.

What caught my attention was a dispute about the impact of the loss of the federal personal and dependency exemptions. Many Michigan tax experts agree that with that loss, taxpayers will be claiming zero exemptions on their federal income tax returns and thus will enter zero on their Michigan income tax returns where it requests the “Number of exemptions claimed on” the federal return. Yet one economist argues that the elimination of the federal personal and dependency exemption deduction simply means that it has been reduced to zero for purposes of computing federal income taxes but that it has not been eliminated. This economist informed the Michigan Department of Treasury that no legislative action is required and that “Michigan's income tax payers will not lose their state income tax exemptions ... and will not be subjected to a large income tax hike.” He might be correct. According to Michigan Compiled Laws section 206.30(2), the Michigan exemption deduction is based on the “number of personal or dependency exemptions allowable on the taxpayer's federal income tax return pursuant to the internal revenue code.” Section 151(d)(5), as enacted by section 11041 of Public Law 115-97 reduces the federal exemption amount to zero and then provides that “For purposes of any other provision of this title, the reduction of the exemption amount to zero under subparagraph (A) shall not be taken into account in determining whether a deduction is allowed or allowable, or whether a taxpayer is entitled to a deduction, under this section.” Though it is modified by “For purposes of any other provision of this title,” and not “For all purposes, including state income tax computations,” the reference in Michigan law to the “number of personal or dependency exemptions allowable on the taxpayer’s federal income tax return” should be sufficient to preserve the Michigan deduction.

Two concerns for Michigan are apparent. First, the instruction on the Michigan income tax return and the explanation in the instruction booklet that refer to exemptions “claimed on the taxpayer’s federal income tax return” need to be changed. Why? Because taxpayers will not be claiming exemptions on the federal return. The reference will need to be to exemptions “allowable for federal income tax purposes,” or, “exemptions that would be claimed on the federal income tax return if the federal exemption amount were other than zero.” I doubt that the revised Form 1040 will still include a line for personal and dependency exemptions so that all taxpayers can insert a meaningless zero. It is possible that the revised Form 1040 will continue to ask for identification of dependents for other purposes, but it also is possible that the request for dependency information will be relocated to forms for credits or which that information is necessary. It is likely that identification of personal exemptions, in contrast to dependency exemptions, will be requested. And that leads to the second concern. Michigan taxpayers, along with those in other states with similar statutory and instruction language, will need to figure out what their federal personal and dependency exemptions would have been had the federal income tax law not been changed, even though they don’t necessarily need to do that when filling out their federal income tax returns. Developers of tax preparation software surely are not overjoyed.

All of this further reinforces the inescapable fact that the Congress did a slipshod job of dealing with tax “reform” and “simplification.” It did not reform the tax law nor did it simplify the tax law. It simply let the donor class, the 150-some families that now run the country, grab whatever they could grab in step one of a multi-step “return to feudalism and call it free market capitalism” plan that ought to be called “socialism for the oligarchy.”


by James Edward Maule






Making Sense Of The New '20% Qualified Business Income Deduction'

Tony Nitti , CONTRIBUTORI focus on tax policy, court decisions and planning opportunities.  Opinions expressed by Forbes Contributors are their own.


On December 22nd, President Trump signed into law the Tax Cuts and Jobs Act, finalizing a once-in-a-generation overhaul of the existing Code and leaving the once-burdensome tax law so simple, we'll all be preparing our returns on postcards come the spring of 2019.




/wipes tear from cheek


Simple. That's rich. I'll make a deal with you: how about we spend some time diving into just one aspect of the bill -- the new deduction bestowed upon owners of sole proprietorships, S corporations, and partnerships -- and then you decide for yourself just how simple this all will be?


For those of you who are familiar with the format of a "Tax Geek Tuesday," you know what to expect. For those of you who are new to this space, what we do here is beat the heck out of a narrow area of the tax law. In great, painstaking, long-form level of detail. The hope, of course, is that we can accomplish what Congress can't: making the law more manageable for those who need to apply it. Let's get to it.


Entity Choice Under Current Law

If you want to operate a business, there are four main choices for doing so:

  1. C corporation
  2. Sole proprietorship
  3. S corporation
  4. Partnership


Owners of a "C corporation" are subject to double taxation. When income is earned by the corporation, it is first taxed at the business level, at a top tax rate of 35% under current law. Then, when the corporation distributes the income to the shareholder, the shareholder pays tax on the dividend, at a top rate of 23.8%. Thus, from a federal tax perspective, owners of a C corporation pay a combined total rate on the income earned by the business of 50.47% (35% + (65% * 23.8%)).


Of course, you don't have to operate as a C corporation. Instead, you can operate a business as a sole proprietorship. Or as an S corporation. Or as a partnership. And what do these three business types have in common? They all offer a single level of taxation: when income is earned at the business level, it is generally not taxed at that level; rather, the income of the business is ultimately taxed only once, at the individual level.


A sole proprietor simply reports his or her income directly on Schedule C. In the case of an S corporation or a partnership (the so-called "flow-through entities), the income of the business is allocated among the owners and then included on their individual returns. In either scenario, the business owner pays tax on their share of the income at ordinary rates, which rise to as high as 40.8% under current law (39.6% top rate plus a 1.2% phase out of itemized deductions for high earners).


So to summarize, under current law, the top effective tax rates paid by C corporations versus other business types are:

  • C corporations: 50.47%
  • Sole proprietors/shareholders in an S corporation/partners in a partnership: 40.8%


Entity Choice Under the New Law

Regardless of how the plan may have been sold to the public, the foundation of the recently-enacted Tax Cuts and Jobs Act was the reduction in the C corporation tax rate from 35% to 21%. But Congress couldn't do this in isolation, because such a a one-sided dramatic decrease would cause the business playing field to tilt, with sole proprietors and owners of flow-through entities losing much of their advantage over their corporate competitors. To wit, the effective combined rate on corporate owners would become 39.8% (21% + (79%*23.8%), while the top rate on ordinary individual income -- the rate applied to the income of sole proprietors and owners of flow-through entities, whether distributed or not -- would become 37%. Thus, the advantage of a single level of taxation would shrink from 10% to just 2.8%.


While many politicians tend to treat S corporations and partnerships as replacement terms for "small business," the reality is quite the opposite -- many of the largest businesses in America are operated as flow-through entities. As a result, there was tremendous pressure on the tax reform process to provide a break to owners of flow-through businesses so they weren't left out in the cold with the corporate tax cuts.


After the House and Senate initially approached the non-corporate tax break from very different angles, the final law found some common ground, resulting in the creation of Section 199A, a new provision of the Code. On its surface, Section 199A will allow owners of sole proprietorships, S corporations and partnerships -- and yes, even stand-alone rental properties reported on Schedule E --  to take a deduction of 20% against their income from the business. The result of such a provision is to reduce the effective top rate on these types of business income from 40.8% under current law to 29.6% under the new law (a new 37% top rate * a 20% deduction= 29.6%).


Courtesy of this new deduction, sole proprietors and owners of flow-through businesses retain their competitive rate advantage over C corporations: it is 10% under current law, and will be 10% under the new law (39.8% versus 29.6%).


New Section 199A, however, is anything but simple, and the 20% deduction is far from guaranteed to business owners. Claiming the new deduction requires navigating a tangle of limitations, terms of art, thresholds, and phase-ins and phase-outs, with one critical definition thrown in the mix that could potentially jeopardize the whole damn thing.


It's not every day that we get handed a brand spankin' new section of the Code to wrap our arms around. But over the coming months, tax advisors and business owners will be tasked with doing just that. To speed up that process, I figured we should tackle new Section 199A in a Tax Geek Tuesday, and approach this uncharted territory in the best way we know how in this space: with a little bit of Q&A.


But I'm warning you: this is going to get looong. So for ease of future reference , I will break the Q&A into sections so that you can key in on those areas of need. Let's jump in.


Overview of the QBI Deduction

Q: A 20% deduction. How hard can this be? First things first: Who gets to take it? Is it available to all taxpayers? Like, corporations, individuals, partnerships, etc...? 

A: That's actually FOUR questions, which tells me that you really don't understand how a Q&A works. But I get the gist of what you're asking. Section 199A(a) makes clear that the deduction is available to all taxpayers other than a corporation. This would certainly seem to indicate that if an S corporation or partnership has an interest in a lower-tier flow-through entity, the upper-tier S corporation or partnership will have to determine its deduction first, before determining the amount of its income to pass through to its ultimate shareholders or partners. In fact, Section 199A(f)(4)(B) provides that regulations are coming to tell us how to determine the deduction in the case of tiered entities, so yes, it appears that this is in fact the case.


It's also worth nothing that at the last minute, Congress decided to allow the 20% deduction to trusts and estates that own an interest in a flow-through business. Rules under (now-repealed) Section 199 will be provided to determine how a trust or estate determines it's share of the "W-2 wages" and "adjusted basis" limitations we're going to discuss in detail below.


Q: Got it. Sounds like trusts, estates, individuals, and even S corporations and partnerships are eligible for the 20% deduction. So now can you just tell me how the 20% deduction works?

A: Sure, I'll do just that....over the next 9,000 words. We've got a number of terms to define, thresholds to establish, and computations to work through. But let's start with this concept: starting January 1, 2018, anyone who generates "qualified business income" will be entitled to take a deduction of 20% of that qualified business income on their tax return. That is, until the limitations set in.


Let's start by showing how the formula works, and then we'll break it all down, piece by piece.

The deduction is equal to the SUM OF:

  1. The LESSER OF:
    • the "combined qualified business income" of the taxpayer, or
    • 20% of the excess of taxable income over the sum of any net capital gain
  2. PLUS the LESSER OF:
    • 20% of qualified cooperative dividends, or
    • taxable income less net capital gain.

Next, let's simplify things a touch. We're going to focus our attention on the first half of the provision,and leave the "cooperative dividends" section for another day. That leaves us with this:

The deduction is equal to the SUM OF:

  1. The LESSER OF:
    • the "combined qualified business income" of the taxpayer, or
    • 20% of the excess of taxable income over the sum of any net capital gain
  2. PLUS the LESSER OF: 
    • 20% of qualified cooperative dividends, or
    • taxable income less net capital gain. 

Next, let's look the the formula for the first bullet: the determination of the "combined qualified business income" of the taxpayer, and then we'll start tearing this provision to pieces:

Combined qualified business income is actually not income, but rather a deduction. It is:

  1. THE SUM OF:
    • The LESSER OF:
      • 20% of of the taxpayer's "qualified business income" or
        • 50% of the W-2 wages with respect to the business, or
        • 25% of the W-2 wages with respect to the business plus 2.5% of the unadjusted basis of all qualified property.
  2. PLUS:
    • 20% of qualified REIT dividends
    • qualified publicly traded partnership income.

Q: I don't understand a single thing you just wrote. Please tell me this gets better.

A: Have some patience, man. We just got started. Let's knock out the easy part first, by starting with the second half of the equation. Starting January 1, 2018, you will be able to take a 20% deduction against your 1) REIT dividends, and 2) qualified publicly traded partnership income.

A "qualified REIT dividend" is any dividend from a real estate investment trust that isn't either:

  • a capital gain dividend, or
  • a qualified dividend.

"Qualified publicly traded partnership income" is the net amount of any qualified business income (defined below) from a PTP, plus any gain on the sale of a PTP interest that is included in your ordinary income.


Q: That's helpful and all, but I"m really not here to read about REITs and PTPs. I want to understand the first half of the equation, where we can deduct 20% of our income from sole proprietorships, S corporations and partnerships. Can we get to that now?

A: Why, yes. Yes we can. Let's focus on this part for the rest of our time together. You will be entitled to deduct, beginning in 2018, the LESSER OF:

  • 20% of of the taxpayer's "qualified business income" or
    • 50% of the W-2 wages with respect to the business, or
    • 25% of the W-2 wages with respect to the business plus 2.5% of the unadjusted basis of all qualified property.

Let's take it line-by-line, starting with the definition of "qualified business income."


Qualified Business Income

Q: Give it to me. What is "qualified business income?"

A: Will do, but first things first: if I'm going to have to type out "qualified business income" over and over again, I'm going to lose interest in writing this article in a hurry. So let's agree to use "QBI" for short, shall we?


QBI is actually pretty simple; it's defined in Section 199A(c) as the "ordinary" income -- less ordinary deductions -- you earn from a sole-proprietorship, S corporation, or partnership. QBI does not include, however, any wages you earn as an employee. This means that, yes, beginning in 2018, you could have two people doing the exact same job -- one as an independent contractor and one as an employee -- with the self-employment income of the former being considered QBI (and thus eligible for a 20% deduction), while the wages earned by the latter would not be eligible for the 20% deduction.


Q: So why would anyone want to be an employee going forward? Why won't everyone just rearrange their relationship with their employer to become an independent contractor?

A: Good question. First, keep in mind, you can't just call yourself whatever you like. The IRS employs factors to determine who is an employee and who is an independent contractor, so it can ensure it's collecting payroll taxes from the truly responsible party. The primary factor is the "degree of control" the service recipient has over the service provider; in other words, if you're required to work 9-5 every day down at the cracker factory, well, you're an employee, regardless of what you might call yourself.


And don't forget, there are advantages to being an employee. For starters, your employer is on the hook for half of the payroll taxes; become an independent contractor, and you're paying the full 15.3% of Social Security and Medicare tax up to the Social Security wage base ($128,400 in 2018), and then the full 2.9% on income above that threshold.


In addition, employees are eligible for a host of fringe benefits that can be provided by an employer. Tax-free health insurance and employee game rooms can be tough to walk away from. Before you go rushing off to become an independent contractor to save some loot, you've got to take those things into consideration.


Q: Fair enough. So let's go back to someone who owns an interest in an S corporation or a partnership. Do you just add up all of the lines on the Schedule K-1 and call the result "QBI" eligible for the deduction?

A: Absolutely not. QBI does NOT include the following items of investment income:

  • short-term capital gain or loss;
  • long-term capital gain or loss;
  • dividend income; or
  • interest income.


If you are a shareholder or a partner in a flow-through business, it is important to note that QBI also doesn't include any wages or guaranteed payments received from the business. To illustrate, if you own 30% of an S corporation that pays you $40,000 of wages and allocates you $80,000 of income, your QBI from the S corporation is ONLY the $80,000 of income; the $40,000 of wages do not count. And as we'll talk about (much) later, if you're a shareholder in an S corporation who provides significant services and you don't pay yourself any wages, the IRS may treat you as if you took wages anyway, in which case this "reasonable compensation" will not be treated as QBI.


QBI also doesn't include any income that's not "effectively connected with the conduct of a U.S. trade or business," but that's a rabbit hole I"m not willing to go down in this article.


So in summary, when starting the process for determining the amount of the deduction, begin by adding up all of the items of income and deduction on a Schedule K-1 OTHER THAN the aforementioned bullet points. That's your QBI.


Q: QBI has "business" smack dab in the middle of it. Does that mean that to be eligible for the deduction, the activity has to rise to the level of a "business?" I know that is kind of a nebulous standard in the tax law, and I thought a lot of rental properties don't really count as a "business" for many purposes. Does that mean that if I own a single rental property in my individual capacity that I report on Schedule E, and that property produces income, I won't be entitled to a 20% deduction against the income?

A: You're smarter than you look. Here's what we know: clearly, the 20% deduction is intended to apply to rental income, because a last-minute change was made to the limitation on the deduction (as discussed in detail below) specifically to accommodate rental owners.

But here's what we don't know:


Section 199A(c)(c) requires only that QBI be earned in a "qualified trade or business," and that language is a bit scary. Why? Because as crazy as it sounds, the term "trade or business" is not well defined by the tax law. In fact, there are a number of different interpretations of what constitutes a trade or business for different purposes of the Code. The highest standard, however, is that of a "Section 162" trade or business, and in order for an activity to achieve this standard, the business must be regular, continuous, and substantial.


Over 100 years of judicial precedent has not provided much insight into whether a rental activity rises to the level of a "Section 162 trade or business." The determination depends on many factors: How long is the lease? Is the lease gross or triple net? What type of property is being leased?


As you've probably guessed, this new statutory language is rife with peril. When Section 199A(d) requires that QBI be earned in a "trade or business," does it mean a "Section 162 trade or business?" And even if it doesn't, because it doesn't specifically say it DOESN'T require a Section 162 trade or business, will the courts interpret "trade or business" in Section 199A to mean a Section 162 trade or business?


And if that's the case, will some rental activities NOT rise to the level of a Section 162 trade or business --as is currently the case under the law -- precluding owners of the activities from claiming the 20% deduction?


I wish I could provide a more concrete conclusion, but this is the tax law we live in. For example, the net investment income tax rules of Section 1411 also refer regularly to the concept of a "trade or business," but those regulations: 1. make clear that they are referring to a Section 162 trade or business, and 2. take great pains to allow rental owners to not HAVE to try and navigate a century's worth of muddled case history in order to determine whether their rental activities rise to the level of a Section 162 trade or business.


Section 199A, however, is in its infancy. We don't have regulations. We only have a blanket reference to a "trade or business," which without further clarity, I would think HAS to be interpreted to mean a Section 162 trade or business. Which means, yes, certain rental activities may not meet this definition -- for example, a triple-net lease where the owner has almost no regular involvement -- thereby denying the owner a 20% deduction.


Q: Man, am I ever sorry that I asked. How about we agree to check back in on that one when the IRS offers some explanation, OK? Good. So once I've got QBI, I just multiply by 20%, right? If my share of ordinary income from an S corporation or partnership or sole proprietorship is $400,000, I just take $400,000 * 20% and deduct the resulting $80,000 on my tax return, right?

A: Not quite. You computed the $80,000 correctly, but your work has just begun. This is when the limitations kick in.


W-2 Limitations

Q: Wait a second...what are these limitations you speak of?

A: There are several. Some are quantitative, others are business based. Let's start with the numerical limitations. You are only entitled to deduct 20% of QBI up to a limit. That limit is the GREATER OF:

  • 50% of your allocable share of the "W-2 wages" paid by the business, or
  • 25% of your allocable share of the "W-2 pages" paid by the business PLUS 2.5% of your allocable share of the "unadjusted basis" immediately after acquisition of all "qualified property." 


Q: Those limitations contain a lot of italics and terms in quotations. That means this is a giant pain in the ass, isn't it? Why does it have to be this way?

A: That's two questions, so you're still not getting the gist of this Q&A thing, but here goes:

First, yes, these limitations are a pain in the ass.


Second, there is a good reason why those limitations exist -- they are intended to prevent abuse of the new system. Consider the following illustration:


I'm a partner at a BIG, PRESTIGIOUS ACCOUNTING FIRM. I am also, however, an employee; one who collects a wage. Now, let's just assume that my annual wage is $800,000 (it is not). With the new rules coming down and offering a 20% deduction against my income, what would prevent me from quitting my current gig, and then having my firm engage the services of "Tony Nitti, Inc." a brand new S corporation I've set up specifically to facilitate my tax shenanigans? Now, my firm pays that same $800,000 to my S corporation, and my S corporation simply allows that income to flow through to be as QBI. I, in turn, take a 20% deduction against that income, reducing my income to $640,000. See the problem?


My role at my firm hasn't changed. I provided accounting services before, I provide accounting services now. But before, I was receiving wages taxed at ordinary rates as high as 37%. Now, by converting to an S corporation and foregoing wages in favor of QBI, I am now paying an effective rate on that income of only 29.6% (37% * 80%). That's not fair, is it? Compensation for services should be taxed at the same rate, whether it's coming to me as a salary or flow-through income.


To prevent these abuses, Congress enacted the W-2 limitations. Because, in my example, Tony Nitti, Inc. does not pay any wages, in both scenarios my limitation would be a big fat ZERO, meaning I get no deduction. Like so:


My deduction is the LESSER OF:

  1. 20% of $800,000, or $160,000, or
  2. The GREATER OF:
    1. 50% of W-2 wages, or $0, or
    2. 25% of W-2 wages, or $0, plus 2.5% of the unadjusted basis of the LLC's assets, or $0, for a total of $0..


Q: That actually does make some sense. Now that you've explained why the limitations exist, maybe you could explain how they work, particularly all of those terms you put in italics an quotes. For example, why did you italicize your allocable share over and over again?

A: Because it has been my experience that you only learn through repetition, that's why. And here's the thing: I've already heard people make the mistake of suggesting that a shareholder's or partner's limitation is based on 50% or 25% of the TOTAL W-2 wages paid by the business. That would only be the case if you happen to be the sole owner of the business. If you're not, then you have to first determine your allocable share of the W-2 wages.


Q: This is going to require some clarification. First, what exactly are W-2 wages? Do things like management fees or payments to independent contractors count? And then, how does a  shareholder or partner determine his or her share of the partnership's W-2 wages?

A: Let's take those one by one. First, W-2 wages are exactly that: wages paid to an employee, INCLUDING any elective deferrals into a Section 401(k)-type vehicle or other deferred compensation. W-2 wages do NOT INCLUDE, however, things like payments to an independent contractor or management fees, because new Section 199A(b)(4)(C) clearly states that an amount is not a W-2 wage for these purposes unless it shows up on a payroll tax return.


Next, how we do determine a shareholder or partner's allocable share of W-2 wages? For a shareholder in an S corporation, it's a piece of cake: Section 1366 and Section 1377 require that all items of an S corporation be allocated pro-rata, on a per-share/per-day basis.


Things get a bit more tricky for a partner in a partnership, however, because partnerships can -- subject to the substantial economic effect rules of Section 704(b) -- "specially allocate" different items of income, gain, loss and deduction among its partners at different percentages. Thus, without concrete guidance, it would be unclear how a partner in this type of partnership determines their share of the W-2 wages.


Luckily, Section 199A(f)(1) tells us that a partner's share of a partnership's W-2 wages is, quite logically, determined in the same manner as his share of the partnership's wage deduction. Thus, if you are own a 20% capital stake in a partnership, but under the terms of the agreement you are allocated 80% of any depreciation but only 30% of Schedule K-1, Line 1 ordinary income, then because you are being allocated 30% of the partnership's wage deduction via your Line 1 allocation, you are stuck being allocated only 30% of the partnership's W-2 wage expense for the purposes of these limitations.


Here's an example:


A is a 30% owner of ABC, LLC. The LLC produced total ordinary income of $3,000,000. The LLC paid total W-2 wages of $1,000,000, and the total adjusted basis of property held by ABC, LLC is $100,000. A is allocated 30% of all items of the partnership. 

A is entitled to a deduction equal to the LESSER OF:




A's Allocable Share (30%)    

20% Deduction










A's Allocable Share (30%)    

50% Limitation           

W-2 Wages





or the TOTAL OF:



A's Allocable Share (30%)    

25% Limitation                 

2.5% Limitation


W-2 Wages






Unadjusted basis of property










Thus, A is entitled to a deduction of $150,000, the lesser of:

  • $180,000, or
  • the greater of:
    • $150,000 or
    • $75,750.


Q: I noticed that the second limitation is based not only on W-2 wages, but also the partner's or shareholder's allocable share of 2.5% of the "unadjusted basis" of "qualified property." Explain.

A: That's more of an order than a question, but here goes. Let's start with "qualified property:" this is defined in Section 199A(b)(6)(A) as any tangible property, subject to depreciation (meaning inventory doesn't count), which is held by the business at the end of the year and is used -- at ANY point in the year -- in the production of QBI. But there's a catch: if you're going to count the basis towards your limitation, the "depreciable period" of the period could not have ended prior to the last day of the year for which you are trying to take the deduction.


The depreciable period -- and I've seen a LOT of confusion about this -- starts on the date the property is placed in service and ends on the LATER OF:

  • 10 years, or
  • the last day of the last full year in the asset's "regular" (not ADS) depreciation period.


To illustrate, assume S Co. purchases a piece of machinery on November 18, 2014. The machinery is used in the business, and is depreciated over 5 years. Even though the depreciable life of the asset is only 5 years, the owners of S Co. will be able to take the unadjusted basis of $10,000 into consideration for purposes of this second limitation for ten full years, from 2014-2023, because the qualifying period runs for the LONGER of the useful life (5 years) OR 10 years.


Consider the same facts, only the asset is a non-residential rental building that is depreciated over 39 years. The shareholders of S Co. will be able to take their share of the building's basis into consideration from 2014-2052, the last full year of the asset's depreciation schedule.


Four quick notes:

  1. The basis taken into consideration is "unadjusted basis," meaning it is NOT reduced by any depreciation deductions. In fact, Section 199A(b)(2)(B)(ii) requires that you take into consideration the basis of the property "immediately after acquisition."
  2. Any asset that was fully depreciated prior to 2018, unless it was placed in service after 2008, will not count towards basis.
  3. Just as with W-2 wages, a shareholder or partner may only take into consideration for purposes of applying the limitation 2.5% his or her allocable share of the basis of the property. So if the total basis of S corporation property is $1,000,000 and you are a 20% shareholder, your basis limitation is $1,000,000 * 20% * 2.5% = $5,000.
  4. If you are a partner in a partnership, you must allocate your share of asset basis in the same manner in which you are allocated depreciation expense from the partnership. So go back to my earlier example where a partnership allocated W-2 wages, and the partner owned 20% of the capital of a partnership, was allocated 80% of depreciation, and only 30% of Schedule K-1, Line 1, ordinary income or loss. While that partner would be allocated 30% of the W-2 wages paid by the partnership, he or she would be allocated 80% of the unadjusted basis of the property, because that is the percentage of depreciation he is allocated.


Q: That's a lot to take in. I've gotta' ask: I understand that the point of the "50% of W-2 wages" limitation was to prevent abuses where people forego salary for tax-favored flow-through income, but what's the point of this second limitation, the one that allows for the 20% deduction up to 25% of your share of W-2 wages PLUS 2.5% of your share of the unadjusted basis of the property?

A: That second limitation, my friend, is a prime example of how the sausage really gets made on Capitol Hill. Follow along:


Under the House bill, owners of S corporations and partnerships would have gotten a top 25% tax rate on their income. Unfortunately, the only way to get the 25% rate on ALL income was to be a "passive owner." Who are passive owners? Those that either:

  1. Own rental real estate, or
  2. Own non-rental businesses, and don't show up at work enough to "materially participate."


Thus, under the House bill, rental income would have been taxed at a top rate of 25%.


The Senate bill, however, took a different tack in trying to bestow a benefit on flow-through business owners. Rather than incentivize people to work less with the promise of a 25% tax rate, the Senate offered the deduction we're dealing with now, without differentiating between "passive" and "nonpassive" business owners. But in the initial Senate bill, the deduction would have simply been capped at 50% of each owner's share of the W-2 wages of the business; this "share of property basis" rule didn't exist.


And here's the problem with that: most large rental activities don't pay W-2 wages; instead, they tend to pay management fees to a management company. As a result, if the law hadn't been massaged, owners of large rental empires would have gotten no 20% deduction, meaning they would be paying 37% on their rental income as opposed to 25% under the House bill. And that wasn't going to fly.


So at the 11th hour, the conference committee added in this SECOND limitation, allowing for a 20% deduction up to the GREATER of:

  1. 50% of W-2 wages, or
  2. 25% of W-2 wages PLUS 2.5% of unadjusted basis of property.


This made President Trump Senator Corker rental owners very happy, because they were suddenly eligible for a deduction they otherwise wouldn't' have gotten. To illustrate:


A owns a 50% interest in a commercial rental properties through an LLC. A's share of the rental income of the LLC is $1,500,000. The LLC pays no W-2 wages, rather, it pays a management fee to an S corporation A controls. The management company pays W-2 wages, but also breaks even, passing out no net income to A. A's share of the total unadjusted basis of the commercial rental property is $10,000,000.


Until mere days before the final legislation was agreed upon, A would not have been entitled to a 20% deduction against his $1.500,000 of QBI, because he ran up against the 50% of W-2 wages limitation ($0). After the 11th hour change, however, A is now entitled to a deduction - assuming the rental activities rise to the level of a Section 162 business, as discussed above -- equal to the LESSER OF:

  1. 20% of QBI of $1,500,000 ($300,000) or
  2. 2.5% of the unadjusted asset basis of $10,000,000 ($250,000).


As a result, A grabs a $250,000 deduction that was very nearly nil.


Q: Couldn't all this be avoided if someone was permitted to elect to group all of their businesses or rental activities together? For example, say someone owns 20 rental properties through 20 different LLCs -- with none of them paying W-2 wages -- but also owns a property management company that pays SIGNIFICANT W-2 wages. Why can't they just elect to group the 20 rentals with the management company, pulling in the W-2 wages for purposes of the limitation?

A: It's an interesting point, but as of right now, it certainly appears that the 20% deduction will be required to be computed with respect to each separate business owned by the individual. For starters, Section 199A(b)(1)(A) requires that the deduction be computed for "each" qualified trade or business. And then there's the fact that the provision works in terms of "businesses," rather than "activities," so it appears that Section 199A would not be able to leverage off of the existing elective grouping regime of Section 469 that applies to "activities." So for now, at least, I think we can count on computing the deduction for each separate business.


Q: Understood. So the bill is good for big landlords, but what about the little guy? What if I earn $150,000 from my small business LLC, but the business pays, for example, only $10,000 of wages and has no significant property? Am I limited to taking only a $5,000 deduction, equal to the LESSER OF:

  1. QBI of $150,000 * 20%, or $30,000, or
  2. 50% of W-2 wages of $10,000, or $5,000

A: At first blush, that's exactly what would happen. But the new law isn't justabout trying to help the Monte Burns of the world; it offers something to your average Joe Sixpack as well, in the form of an exception to the W-2 limit.


Exception to W-2 Wage Limitations

Q: Hey, I'm an average Joe Sixpack! Kindly explain how this exception would work.

A: Here goes: Section 199A(b)(3)(A) provides that if your TAXABLE INCOME for the year -- not adjusted gross income, not QBI, but TAXABLE INCOME -- is less than the "threshold amount" for the year, then you can simply ignore the two W-2-based limitations. The "threshold amounts" for 2018 are $315,000 if you are married, and $157,500 for all other taxpayers. These amounts will be indexed for inflation starting in 2019. And quite obviously, you determine taxable income WITHOUT factoring in any potential 20% deduction that we're discussing here.


Q: Interesting. I'm married; so if I my taxable income is less than $315,000 -- and it is -- I get to just take a deduction of 20% of QBI and call it a day?

A: That's it? Let's look at an example:

A has QBI of $200,000 from an S corporation that paid a total of $30,000 of W-2 wages and that has no qualified property. A's spouse has $50,000 of W-2 income, and A and B have interest income of $20,000. Thus, total taxable income is $270,000. 

Normally, A's deduction would be limited to $15,000,  the LESSER OF: 

  1. 20% of QBI of $200,000, or $40,000, or
  2. The GREATER OF:
    1. 50% of W-2 wages of $30,000, or $15,000, or
    2. 25% of $30,000 plus 2.5% of $0, or $7,500.

While normally, A's deduction would be limited to $15,000, because A's taxable income is $270,000 -- which the last time I checked, is less than $315,000 -- the two limitations are disregarded, and A simply takes a deduction equal to 20% of QBI, or $40,000.


Phase-In of W-2 Limitations

Q: That's great news. But you know where I'm heading with this, don't you? Next year I expect my S corporation to make more money, pushing me over $315,000 in taxable income. Now what? Do I have to deal with the W-2 limitations again?

A: That, my friend, depends on how much you go over that $315,000 limit. This is where some math will be required.


Section 199A(b)(3)(B) provides that once your taxable income exceeds the threshold ($315,000 if married filing jointly; $157,500 for everyone else), you have to start factoring in the W-2 limitations, but not all at once. Rather, the W-2 limitations will be "phased in" over the next $100,000 of taxable income (if you're married filing jointly, or $50,000 for everyone else).

It's a multi-step process, but if you break it down piece by piece, it makes sense. Let's look at an example:


A and B are married. A earns $300,000 from an S corporation. A's share of the W-2 wages paid by the S corporation is $40,000. A's share of the unadjusted basis of qualified property held by the S corporation is $0. B earns wages from her job, so that taxable income for A and B in 2018 is $375,000.


How do we compute A's deduction?


Step 1: We start by asking the following question: what would A's deduction have been if his taxable income was less than $315,000? This is simple: at that level of income, the W-2 limits wouldn't apply, and A would take a deduction of 20% of QBI of $300,000 or $60,000.


Step 2: If A were given a $60,000 deduction because taxable income was less than $315,000, how big of a break would the law have been giving A compared to a situation where the W-2 limits applied in full?  Stated another way, how does A's $60,000 deduction compare to what it WOULD have been if the W-2 limits did apply? If they applied, A's $60,000 deduction would have been limited to the GREATER OF:

  • 50% of $40,000 or $20,000, or
  • 25% of $40,000 plus 2.5% of $0, or $10,000.


So if the W-2 limitations HAD applied, A would have been entitled to a deduction of only $20,000. This means that if taxable income had been $315,000 or less, the new law would have given A a break in the form of $40,000 of additional deduction ($60,000 - $20,000). This is known as the "excess amount" in Section 199A(b)(3)(A)(ii), but I just want you to think of it as the "get out of jail free" card the new law gives you when your taxable income is below the thresholds.


Once your taxable income is above the threshold, however, you start to lose the benefit of that "get out of jail free" card, bit-by-bit, over the next $100,000 of taxable income ($50,000 if you're not married filing jointly). But by how much?


Step 3: Look at it this way: A gets a TOTAL RANGE of $100,000 of taxable income -- from $315,000 to $415,000 -- before his $40,000 "get out of jail free" card is totally eliminated. So it makes sense that the $40,000 benefit should be reduced based on how far you are into that $100,000 range. It works like so: you start by determining by how much your taxable income exceeds your threshold:

Taxable income:


Less: threshold:

($315,000 )

Excess taxable income: 



A has gone $60,000 of the way through a $100,000 phase in range. Next, we put it into percentage terms. Here is how much of his "get out of jail free" card of $40,000 A should no longer be entitled to;

Excess taxable income:


Divided by: Total phase-in range


Percentage of benefit A should lose:   



Step 4: A started with a benefit of $40,000: a $60,000 deduction when a $20,000 W-2 limit would have otherwise applied. Now that A has burned through 60% of that phase-in range, he should lose 60% of that $40,000 benefit, or $24,000. Thus, as a final step, we reduce A's $60,000 deduction by the amount of the "get out of jail free" card that he has lost because his income is too high:

20% of QBI deduction:


Reduction in $40,000 benefit because income is over $315,000:


Final deduction



Thus, A is entitled to a deduction of only $36,000.


To prove the system works, look what happens if taxable income was $415,000,  but everything else remained the same:


Step 1: Tentative deduction would still be $60,000


Step 2: Excess amount -- think, "get out of jail free" card -- would still be $40,000 ($60,000 - $20,000)


Step 3: Excess taxable income amount would now be $100,000 ($415,000 - $315,000) and thus the amount by which A has burned through the phase-in range would be 100% ($100,000/$100,000).


Step 4: As a result, A must reduce his $40,000 "get out of jail free" card by 100%, or $40,000. This leaves him with a deduction of $20,000 ($60,000 - $40,000 reduction).


Because A is left with a deduction of $20,000, the system works. Remember, $20,000 is the amount A would have been entitled to deduct if the W-2 limit had applied in full, which it should once taxable income hits $415,000. My work is done here.


Q: That is pretty neat, but we're not done yet. Now that I understand these W-2 limits, I'm still a bit confused. What would prevent Mr. Big FANCYPANTS LAWYER from quitting his job as an employee, and having his $700,000 salary be paid into an S corporation he sets up. The S corporation can then pay him $200,000 in W-2 wages, and let the remaining $500,000 flow-through as income eligible for the 20% deduction. He wouldn't run into a W-2 limit problem, because 20% of $500,000 ($100,000) is not greater than 50% of W-2 wages ($100,000). Hasn't this lawyer just converted $500,000 of W-2 income into $400,000 of QBI?


A: That's an exceedingly long question, but at least it shows that you're following along. Yes, at this point in the game, it looks like the lawyer can do that, but you have to understand something: NOT ALL BUSINESSES ARE ELIGIBLE FOR THE 20% DEDUCTION.


Treatment of "Specified Service Trades or Businesses"

Q: Wait...certain businesses can't take the deduction? Which ones?

A: This, my friend, is likely to become one of the more prevalent --and impactful -- questions in all of the tax law over the coming years. It starts like so: Section 199A(d)(1) makes clear that there are two "trades or businesses" that are not eligible for the 20% of QBI deduction:

  1. Anyone who is in the business of being an employee (yes, being an employee is considered being in a business), and
  2. Any "specified service trade or business." 


Then, Section 199A(d)(2)(A) defines a "specified trade or business" in reference to Section 1202(e)(3)(A), which includes the following:


"any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees."


Q: OK, I recognize most of those businesses. But now I must ask: why? What's the point of handpicking these businesses and saying, "NO DEDUCTION FOR YOU."

A: While the businesses selected may seem arbitrary at first blush, they actually makes sense. In each business, the people who make up the business -- whether they be lawyers or accountants or doctors -- only offer clients or customers one thing: services. They don't sell goods. They don't build stuff. They simply provide services.


And when viewed through that lens, it makes sense to eliminate these businesses from qualification for the 20% deduction. After all, when someone provides services, the payment they receive in return should be taxed as wages, or at least at the same rates as wages (i.e., ordinary income). So if you have an entire business that does nothing but provide services, it should follow that all of the income generated by the business should be taxed the same way wages would be taxed -- as ordinary income.


Go back to the previous example about the lawyer. Lawyers provide services; that's it; that's all. So if you allow a lawyer to form an LLC to collect what was once wages, and then get a 20% deduction against that income, you have allowed a service provider to convert what would have been wages taxed at a top rate of 37% into tax-favored QBI taxed at an effective rate of 29.6%. And that ain't right.


Looking at it from the opposite direction, if you own an S corporation or partnership that isn't engaged in a "specified service trade or business" -- like a fast-food restaurant -- then it follows that some of the income generated by the business isn't necessarily attributable to the skill and services of the employees and owners. Some of the revenue, rather, is generated from the highly efficient deep fryer. The alluring ambiance. The primal pleasure of consuming nearly a pound of fried beef in one sitting. So Congress can justify giving a special deduction -- and therefore a lower effective tax rate -- to these types of businesses because the argument can be made that some of the income allocated to the owners is not a return on the efforts of those owners and their employees, but rather on the capital the owners invested in the business to buy the equipment that in turn created part of the revenue.


Q: You know...that does kind of make sense. So the owners of the following businesses get no deduction: accounting, law, health, archit...

A: Stop right there. Section 199A modifies the definition of "specified service businesses" found in Section 1202 in a couple of important ways:


  • It removes architects and engineers from the businesses barred from taking the 20% deduction. Why? These types of businesses were eligible, in limited circumstances, for a Section 199 "manufacturer's deduction" before that provision was eliminated as part of the new law. This is because, unlike accountants and lawyers, architects and engineers are an integral part of actually, you know...building something. As an accountant, I create nothing, unless you could a 10,000 word missive on just one provision of the new tax law "something."
  • The definition of disqualified businesses for purposes of Section 199A ignores Sections 1202(e)(3)(B), which adds additional types of businesses to those in Section 1202(e)(3)(A) as the types of businesses barred from using Section 1202 (which we'll get into in a moment). Those types of businesses listed in (e)(3)(B), which are disqualified under Section 1202 but NOT under Section 199A, include:
    • banking,
    • insurance,
    • financing,
    • leasing,
    • investing,
    • farming,
    • any business giving rise to depletion,
    • any business of operating a hotel, motel, (Holiday Iiiin), or restaurant.
  • So at this point, those bulleted businesses ARE eligible for the 20% of QBI deduction. But then Section 199A(d)(2)(B) adds MORE businesses that don't qualify for the 20% deduction, namely, the business of investing and investing management, trading, or dealing in securities, partnership interests, or commodities. So now those businesses are back OUT of the Section 199A deduction.


Q: So if I'm following you correctly, whether a business is a "specified service business" is going to be critical under the new law; after all, if you are a specified service business, you get no deduction. If you're not, 20% off the top, right?

A: Yes, it's going to be VERY important. And here's the problem: despite the fact that Section 1202 was enacted in 1993, we have almost no available guidance from regulations, administrative rulings, or judicial precedent to help us determine what is and isn't a "service business" for purposes of Section 1202. Here's why:


Section 1202 gives the holder of "qualified small business stock" an exclusion from gain upon the sale of such stock that has been held for longer than five years. Part of the requirements for qualifying as QSB stock is that the corporation can't be engaged in one of the service businesses described above in Sections 1202(e)(3)(A) and (e)(3)(B).


Thus, one would think that with a 24-year history, the "service business" requirement of Section 1202 would be well-worn territory. But the reality is, taxpayers didn't care about or use Section 1202 until 2010. Why? For all QSB stock issued up to 2010, the exclusion from gain was only 50%, with the other 50% of gain taxed at 28%. This meant that sellers of QSB stock paid tax on the gain at an effective rate of 14%, and since most taxpayers pay tax on long-term capital gains at 15%, prior versions of Section 1202 only conferred a 1% benefit on taxpayers. Hence, the provision wasn't used a whole heck of a lot.


Starting with stock issued in September of 2010, however, the exclusion of gain from QSB stock held more than 5 years increased to 100%. While this change makes the exclusion significantly more valuable, its relatively recent addition to the Code means that the new, improved version of Section 1202 didn't start to reap dividends to shareholders until September 2015. This, in turn, means that we're just about at the point where Section 1202 arguments should start showing up in the Tax Court. As a result, we may start seeing some debate about what constitutes a service business for purposes of Section 1202(e)(3)(A) -- and now, Section 199A -- and quite frankly, we're going to need it.


The definitional debate has already gone crazy on the interwebs. For example: what do we do about an insurance business? Section 1202(e)(3)(B) included "insurance" among its disqualified businesses, but then Section 199A chose to link its definition of disqualified businesses only to Section 1202(e)(3)(A). Does this mean that insurance businesses are good to go under Section 199A?


Maybe, but wait...what type of "insurance" business is Section 1202 referring to? The business of selling insurance, or the business of actually creating insurance package? I honestly have no idea, and I doubt many others do either. But we're going to have to find out.


Q: That does sound like a bit of a problem. But for now, we should just assume that lawyers, doctors, accountants, etc... are out and can't get the deduction?

A: You should know better than that. Nothing is that simple. Listen up: even if you're in one of those prohibited "specified service businesses," you can claim the 20% deduction, provided your taxable income is less than $315,000 (if you're married filing jointly, $157,500 for all other taxpayers). 


Q: Those are the same thresholds as the ones we used for the W-2 limitations, right? So does that mean the phase-in rule is the same, where the ability to take the deduction for owners of "specified service businesses" is eliminated over a span of $100,000 of taxable income for married taxpayers?

A: You got it. But before we get into the phase-in rule for service businesses, let's just look at a couple of simple examples:

Example 1: A is partner in a law firm. A is married, and has taxable income of $800,000. A's share of the income of the law firm is $700,000, his share of the W-2 wages of the law firm is $100,000, and his share of the unadjusted basis of the assets of the business is $20,000. A is entitled to no deduction, because a law firm is a specified service business and A's taxable income exceeds $415,000, meaning he is completely phased-out of any possible deduction. 

Example 2: Same as in Example 1, except A's taxable income is $300,000, his share of the income of the law firm LLC is $200,000, his share of the W-2 wages is $60,000, and his share of the assets of the LLC is $40,000. Even though A is a lawyer, he may take the deduction because his taxable income is below $315,000, the start of the phase-in threshold. As a result, A can take a deduction of 20% of $200,000, or $40,000. 


Q: But Example 2, 50% of A's share of the W-2 wages of the law firm is only $30,000. Shouldn't his $40,000 deduction be limited to $30,000 under the first W-2 limitation?

A: Great catch, but as is usually the case, you're wrong. Remember, when taxable income is less than $315,000, the W-2 limitations don't apply. As a result, A is entitled to the full $40,000 deduction.


Phase-Out of Deduction for Specified Service Businesses

Q: I follow those examples, but I'm almost afraid to ask: what happens to a lawyer, doctor, accountant, etc...if taxable income starts to exceed $315,000 for a married couple?

A: Yeah, I wish we could skip that whole thing, but this is where the magic happens. Just like with the W-2 limitation, the "get out of jail free" card Congress gives owners of specified service businesses -- the ability to take the 20% deduction -- starts to disappear once taxable income exceeds $315,000 for married taxpayers ($157,500 for everyone else), and is completely gone by the time taxable income hits $415,000 ($207,500).


To illustrate, assume the following example. It should seem familiar, as it was the same fact pattern we used before for a non-specified service business.


A and B are married. A earns $300,000 from an S corporation. A's share of the W-2 wages paid by the S corporation is $40,000. A's share of the unadjusted basis of qualified property held by the S corporation is $0. B earns wages from her job, so that taxable income for A and B in 2018 is $375,000. This time, A is a lawyer, so his $300,000 of income from his S corporation is from a disqualified "specified service business." 


Step 1: We start by determining what A's deduction would have been if his taxable income had been less than $315,000. This is determined by taking the LESSER OF:

  1. 20% of QBI of $300,000, or $60,000, or
  2. the GREATER OF:
    • 50% of W-2 wages of $40,000, or $20,000, or
    • 25% of $W-2 wages of $40,000 + 2.5% of basis of property of $0, or $10,000.


But wait...don't forget that if taxable income is less than $315,000, not only does A get to take the deduction despite being a lawyer, in addition, the W-2 limits don't apply at that level of income. Thus, while A would generally be entitled to a deduction of only $20,000 in this case, had taxable income been $315,000 or less, he would have gotten the full $60,000.


Because taxable income is greater than $315,000, however, we must now determine how much of that $60,000 deduction A has to give up.


Step 2: We begin by figuring out, once again, how much of his $100,000 "phase-in" threshold A has exceeded, although now it's probably more accurately described as a "phase-out" threshold. The math looks the same as before:

Taxable income:


Less: threshold:

($315,000 )

Excess taxable income: 



A has gone $60,000 of the way through a $100,000 phase-in range. Putting this into percentage terms, here is how much of the benefit A should lose:

Excess taxable income:


Divided by: Total phase-in range





Step 3: Thus, A should lose 60% of his benefit. Section 199A(d)(3)(B) accomplishes this by requiring A to compute his "applicable percentage," which is simply 100% - the percentage from Step 2:

Starting Percentage


Less: percentage from Step 2:


Applicable percentage



Now that we've determined the applicable percentage, A is only entitled to take into consideration, in computing his deduction, the applicable percentage of his allocable share of QBI, W-2 wages, and basis of assets. Like so:


Allocable Share

Applicable % (40%)




W-2 Wages



Basis of Assets




Next, we determine A's deduction under the general rules using these new numbers:


Step 4: A's deduction is equal to the LESSER OF:

  1. 20% of QBI of $120,000, or $24,000,
  2. or the GREATER OF:
    • 50% of W-2 wages of $16,000, or $8,000, or
    • 25% of W-2 wages of $16,000 , or $4,000, plus 2.5% of basis, or $0, for a total of $4,000.


Thus, A's tentative deduction is $8,000. BUT DON'T FORGET...the W-2 limit doesn't apply if taxable income is less than $315,000, and is phased in as income goes from $315,000 to $415,000. So believe it or not, we now have to jump through those hoops as well. On to Step 5, which starts by figuring out the "get out of jail free" card the new law would have given A if the W-2 limit didn't apply at all:


Step 5: The "get out of jail free" card is the excess of the deduction allowed to A in the absence of a W-2 limit over what the deduction would be if the limit applied in full force. Thus, it is $16,000 ($24,000-$8,000).


Next, we have to reduce that excess benefit based on how much A's taxable income exceeds $315,000.


Step 6: A gets a TOTAL RANGE of $100,000 of taxable income -- from $315,000 to $415,000 -- before his $16,000 "get out of jail free" card is totally eliminated. So it makes sense that the $16,000 benefit should be reduced based on how far A is into that $100,000 range. 


Taxable income:


Less: threshold:

($315,000 )

Excess taxable income: 



A has gone $60,000 of the way through a $100,000 phase-in range. Putting this into percentage terms, here is how much of his "get out of jail free" card of $16,000 A should no longer be entitled to;

Excess taxable income:


Divided by: Total phase-in range


Percentage of benefit A should lose:   



Step 7: A started with a benefit of $16,000: a $24,000 deduction when a $8,000 W-2 limit would have otherwise applied. Now that A has burned through 60% of that phase-in range, he should lose 60% of that $16,000 benefit, or $9,600. Thus, as a final step, we reduce A's $24,000 deduction by the amount of the "get out of jail free" card that he has lost because his income is too high:


20% of QBI deduction:


Reduction in $24,000 benefit because income is over $315,000:


Final deduction



A's final deduction is $14,400. Once again, we know the system works, because if A's taxable income had been $415,000 or greater, his "applicable percentage" in Steps 2 and 3 would have been $0.


Taxable income:


Less: threshold:

($315,000 )

Excess taxable income: 



Then, the percentages:


Excess taxable income:


Divided by: Total phase-in range




Starting Percentage


Less: percentage from Step 2:


Applicable percentage



Finally, we take his applicable percentage of QBI and wages:



Allocable Share

Applicable % (40%)




W-2 Wages



Basis of Assets




Since QBI and W-2 wages are reduced to zero, A gets no deduction, which he shouldn't once taxable income exceeds $415,000.


Q: Let's put this all together: You said the W-2 limits are in place so that people can't convert wages into tax-favored QBI. Then, you said that certain service businesses can't use the deduction at all. But then you said that the W-2 limits don't apply AND service businesses can use the deduction when taxable income is less than $315,000 for married taxpayers ($157,500) for all others. So what is stopping an accountant who gets $300,000 in wages from setting up an S corporation as you mentioned, having the $300,000 paid to the S corporation, paying NO wages out of the S corporation, and converting $300,000 of wage income into $240,000 of QBI?

A: First of all, congratulations on your applied knowledge. Impressive. But this is where the inconsistencies of the current law take hold. Theoretically, you could form an S corporation to do exactly what you just proposed, but there's one issue: S corporations are required to pay wages to any shareholder who is also an officer and provides "significant services" to the corporation. This "reasonable compensation" standard has been around for decades, because Revenue Ruling 59-221 provides that S corporation flow-through income is NOT subject to self-employment tax. As a result, ever since 1959, S corporation shareholders have had tremendous motivation to forego compensation in exchange for distributions in order to save on payroll taxes. The IRS, of course, wants to collect its share of payroll taxes, so it will frequently attack S corporation shareholders who withdraw no wages but take substantial distributions, forcing them to reclassify a portion of distributions to salary and pay the corresponding payroll taxes.


And as you may have noticed, way up above, we said that QBI does NOT include "reasonable compensation" paid to the shareholder. This means that even if an accountant DID set up an S corporation to take $300,000 of what were once wages and pass them through as QBI, even though according to Section 199A this would fly, the IRS could come in and say that some or all of the $300,000 is reasonable compensation, which is NOT treated as QBI. So, for example, if the IRS reclassified $120,000 of the S corporation's income as reasonable compensation, only $180,000 of the S corporation's income would be eligible for the QBI treatment.


The same risk, however, does not exist with partnerships, because: 1. partnerships cannot pay wages to partners, only guaranteed payments, and 2. There is generally no "reasonable compensation" standard for partnerships, because partnership income is usually subject to self-employment tax. Therefore, a partner has nothing to gain by foregoing guaranteed payments in exchange for an increased share of flow-through income, because there would be no payroll tax savings.


Thus, it follows, an accountant or attorney COULD set up an LLC, rather than an S corporation, and convert up to $315,000 of wages into QBI. Of course, over time, the IRS could seek to establish the same type of reasonable compensation standard for partnerships that currently exists for S corporations, minimizing or closing this potential loophole.


Q: So if I'm following you, setting up an LLC could be a loophole. Until it's not. Got it. Anything else I should know?

A: A few things, yes. Let's take a look.


Ancillary Issues

Q: We figured out how to compute the 20% deduction. But where do we actually take it?

A: This is an interesting one: the deduction will NOT be on Page 1 -- as a deduction in computing adjusted gross income -- nor will it be an "itemized deduction" deducted on Schedule A and only available to those who itemize. Rather, it looks like the deduction will take its place on the top of Page 2 as a deduction available to all taxpayers, similar to the standard deduction or personal exemptions.


Q: Does it reduce a taxpayer's self employment income?

A: I don't see how it could, since, as discussed immediately above, it will show up as a deduction on Page 2 of the Form 1040.


Q: What about the individual alternative minimum tax? Can you take the 20% of QBI deduction against AMT taxable income?

A: Based on my reading, you certainly can. Section 199A(f)(2) provdes that when computing alternative minimum taxable income, you determine qualified business income" without taking into consideration any AMT adjustments or preferences as provided in Sections 55 -59. To me, this simply means that QBI is the same for AMT as it is for regular tax, and thus, the 20% deduction is computed the same way. And since the determination of alternative minimum taxable income starts with taxable income, and the amended Code provides no specific add-back to AMTI for the 20% deduction, I say we're good to go.


Q: Let's say my sole proprietorship, S corporation, or partnership generates a loss. There would obviously be no 20% deduction -- since there's no income -- but what happens to that loss in the next year if there is QBI in the following year?

A: It appears that when you have a loss in Year 1 from a QBI-type activity, even if that loss is used in computing taxable income in Year 1 -- when you get to Year 2, that QBI loss "carries over" and reduces Year 2 QBI solely for purposes of computing the 20% of QBI deduction. To illustrate:


A owns 50% of an S corporation. In 2018, the S corporation allocates a $100,000 loss to A. Because A materially participates in the S corporation, he is able to use the $100,000 loss in full to offset his wife's $200,000 of wages. 


In 2019, the S corporation allocates $200,000 of income to A. While A would generally start the process of determining his Section 199A deduction by taking 20% of $200,000, Section 199A(b)(6) provides that in determining A's QBI deduction for 2019, the $200,000 of income must be reduced by the $100,000 of loss from 2018. Thus, while A will still include the full $200,000 of S corporation income in his taxable income in 2019, his deduction will be limited to $20,000 (20% * $100,000) rather than $40,000 (20% * $200,000). 


Q: What if I have a Section 199A deduction in a year I have a net operating loss? Does the deduction add to my NOL?

A: Nope. Section 172(d) has been amended to provide that a net operating loss does NOT include the Section 199A deduction.


Q: That is interesting. Any other weird rules/limitations I should know about?

A: Yes.  Let's come full circle to where we started and remember that it's not just enough to determine the deduction subject to the rules described above. Once you've navigated the specified service business rules, the W-2 and adjusted basis limitations, and the phase-ins and phase-outs, you have to remember that there is also an overall limitation based on taxable income.


About 10,000 words, ago, we laid out the first rule of Section 199A. Under Section 199A(1)(a), once you've determined the 20% deduction, you've got to deal with an overall limitation, where the deduction is equal to the LESSER OF:

  • the combined "qualified business income" of the taxpayer, or
  • 20% of the excess of taxable income minus the sum of any net capital gain


Remember, the combined qualified business income is the 20% deduction we determined above, PLUS qualified REIT dividends PLUS income from a publicly traded partnership. But we can ignore those latter two items for our purposes; I'd prefer to look at the second element of the limitation, where the deduction is limited to 20% of the excess of taxable income over net capital gain. When will this limitation matter? Consider the following example:


A has $100,000 of QBI. In addition, A has $200,000 of long-term capital gains, $20,000 of wages, and $50,000 of itemized deductions, for taxable income of $270,000. A's deduction is limited to the lesser of:

  • 20% of QBI of $100,000, or $20,000, or
  • 20% of ($270,000-$200,000), or $14,000.


Thus, A's deduction is limited to $14,000. Why? Because while A has taxable income of $270,000 -- including $100,000 of QBI -- $200,000 of that taxable income will be taxed at favorable long-term capital gains rates. Thus, there is only $70,000 to be taxed at ordinary rates, meaning the 20% deduction should be limited to $70,000 of income; after all, you don't want to give a 20% deduction against income that's already taxed at a top rate of 23.8%!


Q: You've outdone yourself today. But since all of this law is brand new, there's really no way for me to check your math. How do I know you're right?

A: That's kind of the point. With no regulations, no form instructions, and most unfortunate of all, no one who helped craft the bill or vote on the thing who actually understands what it says, it may be a while before clarify is forthcoming. So for now, I"m all ya' got.



Taking clients to ballgames? Tax law change makes it costlier

By Lynnley Browning


Businesses—especially smaller firms—may scale back on treating clients to major league baseball games, golf outings and the like after Congress and President Donald Trump ended a tax break for such entertainment.


The tax overhaul that Trump signed Dec. 22 eliminated a 50 percent deduction for business-related expenses for “entertainment, amusement or recreation.” Suddenly, luxury boxes at stadiums and arenas—along with theater and concert tickets—will be more costly for firms that use them to woo clients.


Businesses that use the entertainment deduction extensively—including law, investment, accounting and lobbying firms—will have to gauge the effects on their bottom lines. Smaller businesses will be less able to absorb the cost.


“I am a long-time, long-suffering season-ticket holder to the New York Jets, so a lot of time, I take clients,” said Charles Capetanakis, a lawyer and CPA at Davidoff Hutcher & Citron LLP, a mid-sized law firm in New York. Eliminating the deduction “is really going to hurt the small businesses that need to promote their business by entertaining clients.”


The loss of the entertainment deduction is a kind of counterpoint to the Republican Congress’s sweeping tax cuts for businesses. The overhaul slashed the corporate rate to 21 percent from 35 percent. It also created a new 20 percent deduction for many partnerships, limited liability companies, sole proprietorships and other “pass-through” businesses, whose owners pay individual tax rates on the income they earn.


One impact from the loss of the entertainment-expense deduction may be “smaller spends” on professional sports tickets, said Robert Delgado, the principal-in-charge of the compensation and benefits group of the Washington national tax practice at KPMG LLP. But the degree of any reduction “remains to be seen,” said Ed Sturm, a managing director at Deloitte Tax LLP, who heads the tax practice’s meals, travel and entertainment service areas.


“Each company will have to decide for itself whether the higher after-tax cost of these expenses makes good business sense,” Sturm said.


Some have already begun grappling with that decision.


The loss of the entertainment expenses “is painful,” said Washington lobbyist Ryan Ellis, who specializes in tax issues. But there’s still a bright side. Congress didn’t touch another break: Businesses still have a 50 percent deduction for clients’ meals—whether catered or at a restaurant.


Asked how K Street lobbyists in Washington would entertain clients going forward, Ellis said: “At restaurants.”




Bid to collect internet sales tax gets U.S. Supreme Court review

By Greg Stohr


The U.S. Supreme Court will consider freeing state and local governments to collect billions of dollars in sales taxes from online retailers, agreeing to revisit a 26-year-old ruling that has made much of the internet a tax-free zone.


Heeding calls from traditional retailers and dozens of states, the justices said they’ll hear South Dakota’s contention that the 1992 ruling is obsolete in the e-commerce era and should be overturned.


State and local governments could have collected up to $13 billion more in 2017 if they’d been allowed to require sales tax payments from online merchants and other remote sellers, according to a report from the Government Accountability Office, Congress’s non-partisan audit and research agency. Other estimates are even higher. All but five states impose sales taxes.


Online retailers Wayfair Inc., Inc. and Newegg Inc. are opposing South Dakota in the court fight. Each collects sales taxes from customers in only some states.


The case will also affect Inc., though the biggest online retailer isn’t directly involved. When selling its own inventory, Amazon charges sales tax in every state that imposes one, but about half of its sales involve goods owned by third-party merchants. For those items, the company says it’s up to the sellers to collect any taxes, and many don’t.


The court probably will hear arguments in April with a ruling by the end of its nine-month term in late June.


‘Physical Presence’


The high court’s 1992 Quill v. North Dakota ruling, which involved a mail-order company, said retailers can be forced to collect taxes only in states where the company has a “physical presence.” The court invoked the so-called dormant commerce clause, a judge-created legal doctrine that bars states from interfering with interstate commerce unless authorized by Congress.


South Dakota passed its law in 2016 with an eye toward overturning the Quill decision. It requires retailers with more than $100,000 in annual sales in the state to pay a 4.5 percent tax on purchases. Soon after enacting the law, the state filed suit and asked the courts to declare the measure constitutional.


“States’ inability to effectively collect sales tax from internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike,” South Dakota said in its Supreme Court appeal.


Wayfair, Overstock and Newegg said the court should reject the appeal and leave it to Congress to set the rules for online taxes.


Expressing Doubts


“If Quill is overruled, the burdens will fall primarily on small and medium-size companies whose access to a national market will be stifled,” the companies argued. “Congress can address this issue in a balanced and comprehensive manner through legislation.”


Three current justices—Clarence Thomas, Neil Gorsuch and Anthony Kennedy—have expressed doubts about the Quill ruling. Kennedy said in 2015 that Quill had produced a “startling revenue shortfall” in many states, as well as “unfairness” to local retailers and their customers.


“A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier,” Kennedy wrote. “It should be left in place only if a powerful showing can be made that its rationale is still correct.”


Gorsuch, the newest Supreme Court justice, suggested skepticism about Quill as an appeals court judge. And Thomas has said he would jettison the entire dormant commerce clause, saying “it has no basis in the Constitution and has proved unworkable in practice.”


Amazon backs a nationwide approach that would relieve retailers from dealing with a patchwork of state laws. Amazon once relied on the Quill ruling and didn’t collect sales tax at all; the company gradually changed its position as it built warehouses all over the country, giving it a greater physical presence in multiple states.


The case is South Dakota v. Wayfair, 17-494.




Congress isn’t quite done with taxes yet

By Michael Cohn


Even though Congress passed the biggest tax overhaul in more than 30 years only a few weeks ago, there’s likely to be more tax-related legislation coming out in the very near future.


The continuing resolution that lawmakers have been debating to fund the government could contain some tax provisions.


“Immediately there’s a look at the CR coming up in the next week or two having a tax bill attached to that, which will have some of the energy extender provisions that have been on the to-do list for quite a while,” said Dean Zerbe, national managing director at alliantgroup, a former senior counsel and tax counsel for the Senate Finance Committee, during an interview last week. “I think that’s part of it. There’s a cleanup of a number of provisions that have bipartisan support that are small ball, but that would be included as well in that package.”


Congress is also likely to take up a technical corrections bill to fix some of the errors in the hastily drafted Tax Cuts and Jobs Act, although that probably won’t come until later.


“They might do some kind of early bird technical corrections as well,” predicted Zerbe. “They might not quite call it that or draw a lot of attention to it, but I think if they have some early cleanup that they think they need to do, then they might look at doing that. But I think the idea is with the energy provisions, and with the small ball provisions, that they’ll get Democratic support. This is meant to be a bipartisan bill, and this is being attached to a much bigger bill. I think the working plan is to engage with the Democrats and see if they can find some common ground.”


For right now, many Democrats aren’t going to be in the mood to cooperate on helping Republicans patch up the Tax Cuts and Jobs Act after they felt shut out of the process of drafting the far-reaching legislation. But Democrats might agree to do some fixes, especially if it helps them pass some of the endangered tax extender provisions related to renewable energy.


“I think the Democrats are still probably not in the happiest of moods at the end of last session, but we’ve had the holidays,” said Zerbe. “Coming back, I think you may find some folks who always want to stay in their fight corner and not engage. But I think the Republicans are trying to get a bill that attracts Democratic support. At least the early versions of what I’ve seen seem to indicate that. I think that will get a number of Democrats to engage. That doesn’t mean they’re doing handsprings. But if you’ve got a bill that’s bipartisan, you do have to let things go. The tradition of the committee is to work bipartisan. You just can’t keep complaining about the fact that you didn’t invite me to the last dance.”


The energy-related provisions in particular might help Republican lawmakers attract some support from the other side of the aisle. “They don’t wake up thinking warm and fuzzy thoughts,” said Zerbe. “They’re clearly designed to garner Democratic support, and I think they’ll get that. Are they going to get every Democrat voting for it? No, they may not be getting every Republican voting for it either. But I think they can find some things in there.”


Some Democrats may even agree to go along with a larger technical corrections bill eventually.


“I haven’t seen an early bird list, separating out the provisions that people don’t like vs. provisions that were poorly drafted or, more importantly, were drafted in error, that may lead to an unintended bad result,” said Zerbe. “That’s really what you’re looking for. I see people are still wringing their hands about I don’t like this or I don’t like that. Relitigating that really isn’t in the cards. Republicans aren’t going to open that back up. But to say, ‘We had this unintended impact or we didn’t clarify this cross-reference,’ those kinds of things that are traditional, I think if they had an early list, they would do it.”


He thinks the technical fixes are likely to involve some of the business-related provisions for corporations and pass-through businesses. “If Republicans are trying to close something up, it’s probably something in the corporate or the high dollar pass-through level,” said Zerbe. “When you think about it, do you really think Democrats are going to sit down and say, ‘We want to keep this poorly constructed provision in place to create a loophole for corporations to do X’? I’m just talking theoretically. That’s not where they’re going to be. They’re not going to want to make the word safe for sharp-eyed accountants and their pencils to do something. It’s one thing if Republicans screwed something up to make the child credit more generous. I could see something like that, but I don’t think that’s where they’re going to have hiccups. I think they’ll come on the international provisions or the other provisions, and they’ll be trying to maybe look at phase-ins or transition rules.”


He anticipates the two parties will initially be able to find some common ground with some of the energy-related tax extenders.


“There were a number of provisions that were dropped because of the Byrd rule and other rules and didn’t make it that the House cares about, that the Senate care about, that people care about on a bipartisan basis,” said Zerbe. “The energy provisions are very important to the Democrats. That will certainly get them engaged. So it will be nice to have a small-ball bipartisan tax bill that can get some needed clarification on the energy provisions. There are a number of good provisions that were dropped in the tax bill that aren’t controversial, that should be included. I think they’ll do that.”


Afterward there may be an IRS reform bill that some Republicans have pledged to do, though Zerbe doubts there will be any tax increases in the infrastructure bill. “I see that people are already wishing on a star and saying they should raise taxes to pay for the infrastructure bill,” he said. “I don’t think that’s going to happen at all. All the Republicans just went through cutting taxes. They’re not going to turn around and raise taxes for that, so that’s kind of a nonstarter. I think the other business will then be an IRS reform package. I think they’ll file it moving forward in the spring. I would expect that to go forward as well.”




IRS set to enforce passport denials for tax delinquents

By Michael Cohn


The Internal Revenue Service is warning taxpayers who owe more than $51,000 in tax debts they could have their passport applications or renewals denied unless they pay up.


Starting this month, the IRS will start implementing new procedures required under a 2015 law to crack down on individuals with “seriously delinquent tax debts.” The Fixing America’s Surface Transportation (FAST) Act, which was signed into law in December 2015, requires the IRS to notify the State Department of taxpayers the IRS has certified as owing a seriously delinquent tax debt. “Seriously delinquent tax debt” is an individual's unpaid, legally enforceable federal tax debt totaling more than $51,000 (including interest and penalties) for which a notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or a levy has been issued.


The IRS issued Notice 2018-1, which provides guidance for implementation of the new IRC 7345, added by Section 32101 of the FAST Act. Upon receipt of section 7345 certification, the State Department is generally required to deny a passport application for individuals with seriously delinquent tax debts and may also revoke or limit passports previously issued to those individuals. The notice also describes some exceptions to certification and taxpayer remedies. The FAST Act also requires the State Department to deny the passport application or deny renewal of their passport. In some cases, the State Department may revoke the passport.


There are several ways taxpayers can avoid having the IRS notify the State Department of their tax debts. They include:

• Paying the tax debt in full,

• Paying the tax debt timely under an approved installment agreement,

• Paying the tax debt timely under an accepted offer in compromise,

• Paying the tax debt timely under the terms of a settlement agreement with the Department of Justice,

• Having requested or have a pending collection due process appeal with a levy, or

• Having collection suspended because a taxpayer has made an innocent spouse election or requested innocent spouse relief.


A passport won’t be at risk for a taxpayer:

• Who is in bankruptcy,

• Who is identified by the IRS as a victim of tax-related identity theft,

• Whose account the IRS has determined is currently not collectible due to hardship,

• Who is located within a federally declared disaster area,

• Who has a request pending with the IRS for an installment agreement,

• Who has a pending offer in compromise with the IRS,

• Who has an IRS accepted adjustment that will satisfy the debt in full


For taxpayers who are serving in a combat zone and owe a seriously delinquent tax debt, the IRS postpones notifying the State Department and the individual’s passport isn’t subject to denial during this time.

The IRS is advising taxpayers who have fallen behind on their tax obligations to come forward and pay what they owe or arrange a payment plan with the IRS. Taxpayers can often qualify for a relief program:


• Taxpayers can ask for a payment agreement with the IRS by filing Form 9465. They can download the form from and mail it with a tax return, bill or notice. Some taxpayers can enter into an online payment agreement to set up a monthly payment plan for up to 72 months.


• Some financially distressed taxpayers can also qualify for an offer in compromise, an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS examines the taxpayer’s income and assets to weigh the taxpayer’s ability to pay. To help figure out eligibility, use the online Offer in Compromise Pre-Qualifier. has some other advice for taxpayers to catch up on their filing and tax obligations and more information about the revocation or denial of passports because of unpaid taxes.




Tax Reform Isn't Over -- Here Come The States

Joe Harpaz , CONTRIBUTORI analyze tax news for CFOs, investors and business leaders.  Opinions expressed by Forbes Contributors are their own


In his state of the state address earlier this month, New York Gov. Andrew Cuomo branded the new federal tax law “an assault” by the federal government. He's pushing his own tax reform as an "end run" around the federal changes.  (AP Photo/Hans Pennink)


Now that the Federal tax reform bill has passed and the dust has settled on the House and Senate wrangling over corporate tax rates, the minutia of pass-through profits, and the handling of various deductions, most commentators agree that big businesses are coming out on the winning side of the deal.


Business optimism was so pronounced in the immediate aftermath of the bill passing that 125 U.S. employers have since announced plans for bonuses and pay increases for their employees as a direct result of their businesses being more profitable under the new 21% corporate tax rate. Helping to put that tax reform-spurred windfall into perspective, J.P. Morgan Chase just reported earnings that beat analyst expectations after accounting for charges related to the tax bill. The bank disclosed that it took a $2.4 billion charge in the fourth-quarter due to the Tax Cuts and Jobs Act.


Taken at face value, these swift, positive reactions to the reform bill seem to suggest a glory days scenario for businesses as we head into 2018. But it may not be that easy.


While businesses are just now wrestling with implementation of the new federal tax policy and trying to figure out the complexities surrounding international taxes, they can peer around the corner and see a wave of additional changes coming. Simmering just beneath the headline federal tax reform plan, state governments are busy at work hatching their own tax reform measures that will soon make the tax landscape even more complex to navigate for big business.


The federal tax reforms have put pressure on many states – particularly, high-tax states like New York, California, Connecticut, and New Jersey – to implement major tax reforms of their own. Many of these will be aggressive enough to send corporate tax professionals into strategic planning mode for a volatile year ahead.


Consider the situation in New York, where Governor Andrew Cuomo has introduced a tax reform plan that’s already being billed as an “end run around the Trump tax bill.” Though many of the details are still being ironed out, the root of the plan is to reduce the state’s reliance on income taxes that employees pay by starting a new, statewide payroll tax that employers would pay. It is an effort to diminish the negative tax hit many New Yorkers are expected to face from the Federal tax plan’s lower caps on mortgage interest and property tax deductions.


The Cuomo administration says the plan is designed to be revenue neutral for the state, employees, and employers. But implementing a revenue-neutral change to the tax code by shifting taxes from income to payroll isn’t that simple. Plans currently being discussed include everything from lowering workers’ salaries to decrease their income tax exposure to giving companies state tax credits to cover the cost of higher payroll taxes.


And that’s just New York. The list of Governors introducing aggressive reform plans in direct response to the new federal bill is growing by the day.


Missouri Governor Eric Greitens just promised to introduce “the boldest state tax reform in America,” in response to forecasts that the federal tax reform will cost the state upwards of $58 million in lost revenue. His plan is still short on specifics, but he has made it clear that he plans to lower taxes for businesses and individuals.


Connecticut is in the mix, too. Kevin B. Sullivan, the state tax commissioner, explained that legislators are currently looking at replacing at least part of the state income tax with an employer tax or a scheme to turn the income tax into “voluntary contributions” from residents to the state.


Voluntary tax? Hmm.


California is exploring a similar “voluntary” option, which Kevin de Leon, a member of the California state senate, described as a bill that would allow taxpayers to make charitable contributions to an established state fund in order to earn a credit. The goal would be to allow the resident to take the full amount given as a deduction.


The details of the various state plans will, of course, vary as they continue to multiply. The fact that we’re already seeing this level of local-level rhetoric on tax just weeks after the federal law was passed suggests that the remainder of 2018 will be anything but smooth sailing for businesses that need to navigate the tax laws of multiple jurisdictions. Whether the specific state plans will help or hurt businesses still isn’t clear. What we do know is that the frenetic pace of planning, forecasting, and adjusting course mid-stream will be the order of the day for corporate tax professionals for the foreseeable future.




Trump taxes solar imports in biggest blow to renewables yet

By Brian Eckhouse, Ari Natter and Christopher Martin


In the biggest blow he’s dealt to the renewable energy industry yet, President Donald Trump decided on Monday to slap tariffs on imported solar panels.


The U.S. will impose duties of as much as 30 percent on solar equipment made abroad, a move that threatens to handicap a $28 billion industry that relies on parts made abroad for 80 percent of its supply. Just the mere threat of tariffs has shaken solar developers in recent months, with some hoarding panels and others stalling projects in anticipation of higher costs. The Solar Energy Industries Association has projected tens of thousands of job losses in a sector that employed 260,000.


The tariffs are just the latest action Trump has taken that undermine the economics of renewable energy. The administration has already decided to pull the U.S. out of the international Paris climate agreement, rolled back Obama-era regulations on power plant-emissions and passed sweeping tax reforms that constrained financing for solar and wind. The import taxes, however, will prove to be the most targeted strike on the industry yet.


 “Developers may have to walk away from their projects,” Hugh Bromley, a New York-based analyst at Bloomberg New Energy Finance, said in an interview before Trump’s decision. “Some rooftop solar companies may have to pull out” of some states.


U.S. panel maker First Solar Inc. jumped 9 percent to $75.20 in after-hours trading in New York. The Tempe, Arizona-based manufacturer stands to gain as costs for competing, foreign panels rise. First Solar didn’t immediately respond to a request for comment. The Solar Energy Industries Association also didn’t immediately respond.


The first 2.5 gigawatts of imported solar cells will be exempt from the tariffs, Trump said in a statement Monday. The president approved four years of tariffs that start at 30 percent in the first year and gradually drop to 15 percent.


The duties are lower than the 35 percent rate the U.S. International Trade Commission recommended in October after finding that imported panels were harming American manufacturers. The idea behind the tariffs is to raise the costs of cheap imports, particularly from Asia, and level the playing field for those who manufacture the parts domestically.


For Trump, they may represent a step toward making good on a campaign promise to get tough on the country that produces the most panels—China. Trump’s trade issues took a backseat in 2017 while the White House focused on tax reform, but it’s now coming back into the fore: The solar dispute is among several potential trade decisions that also involve washing machines, consumer electronics and steel.


“It’s the first opportunity the president has had to impose tariffs or any sort of trade restriction,” Clark Packard, a trade policy expert at the R Street Institute in Washington, said ahead of the decision. “He’s kind of pining for an opportunity.”


Trump’s solar decision comes almost nine months after Suniva Inc., a bankrupt U.S. module manufacturer with a Chinese majority owner, sought import duties on solar cells and panels. It asserted that it had suffered “serious injury” from a flood of cheap panels produced in Asia. A month later, the U.S. unit of German manufacturer SolarWorld AG signed on as a co-petitioner, adding heft to Suniva’s cause.


An attorney for Solarworld didn’t immediately respond to a request for comment.


Suniva had sought import duties of 32 cents a watt for solar panels produced outside the U.S. and a floor price of 74 cents a watt.


While Trump has broad authority on the size, scope and duration of duties, the dispute may shift to a different venue. China and neighbors including South Korea may opt to challenge the decision at the World Trade Organization—which has rebuffed prior U.S.-imposed tariffs that appeared before it.


Lewis Leibowitz, a Washington-based trade lawyer, expects the matter will wind up with the WTO. “Nothing is very likely to stop the relief in its tracks,” he said before the decision. “It’s going to take a while.”


The solar industry may also attempt a long-shot appeal to Congress.


“Trump wants to show he’s tough on trade, so whatever duties or quotas he imposes will stick, whatever individual senators or congressmen might say,” Gary Hufbauer, a Washington-based senior fellow at the Peterson Institute for International Economics, said by email before the decision.




Trump tax cuts will be smaller than expected for many companies

By Ivan Levingston and Brandon Kochkodin


Opponents of the new corporate tax cuts were right. Many companies didn’t pay the full rate before the law passed—so they won’t see splashy reductions in 2018, according to their own estimates.


The law signed Dec. 22 by President Donald Trump lowered corporate taxes 14 percentage points, to 21 percent from 35 percent. The 24 S&P 500 companies that have shared 2018 guidance with investors are projecting an average savings of 5 percentage points.


Many U.S. companies already paid less than the 35 percent because they stashed profits overseas in lower-tax jurisdictions. The new law, passed by congressional Republicans without any support from Democrats, limits certain deductions on debt interest and executive compensation, said Thomas Holly, a PricewaterhouseCoopers partner in Washington.


 “Essentially, you’re not getting as many deductions, and those can drive your rate up,” Holly said.


The new law adds almost $1.5 trillion to the U.S. government’s deficit over 10 years—before accounting for economic growth or other macroeconomic changes that might result. Corporations love it. A vast majority will pay less in taxes, and unlike tax cuts for individual Americans, the provisions don’t expire.


Financial firms, despite taking billions in tax hits in the fourth quarter to account for repatriating overseas profits and the revaluation of deferred tax assets, will still enjoy lower rates this year.


Financial Firms


Among financial firms in the S&P 500 that have provided guidance on their 2018 effective tax rate, Wells Fargo & Co. said it will see its rate fall the most, by 10 percentage points. Bank of America Corp. and Regions Financial Corp. said they’ll pay about 9 percentage points less. American Express Co. said it’ll save 8 percentage points and the reduction for Bank of New York Mellon Corp. will be 3.4 percentage points. Only State Street Corp. said it expects to pay a higher rate in 2018.



International Business Machines Corp. said it’s also estimating a higher rate in 2018. Chief Financial Officer Jim Kavanaugh called taxes a hindrance during the company’s fourth-quarter earnings call.


“The ones that are in a materially worse position are going to be a very small minority,” said Standard and Poor’s Global Ratings health-care analyst David Kaplan.








Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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