Webinar: Tax Cuts & Jobs Act: Impact on C Corporations

November 06, 2018

The 2017 Tax Cuts and Jobs Act is having significant impact on C corporations. This course addressed the changes and ways to address challenges and opportunities presented by the law.


Transcript

Moderator: We are pleased to welcome you to today's webcast. In order to qualify for your CPE certificate, you will need to remain logged on for at least 50 minutes, respond to three polling questions. We would appreciate if you would complete the evaluation survey following the event. A link to the survey will be emailed to you automatically within the hour following the webinar.

You may submit questions using your questions box on your GoToWebinar panel. We will try to address questions submitted during the program. However, if we are unable to address your question, we will connect with you after the webinar. The presentation is available for download through the handout box on your GoToWebinar panel.

For those of you who meet the criteria, you will receive a CPE certificate from EisnerAmperU@eisneramper.com within 14 business days of confirmed course attendance. Now if you can help me welcome Tom Cardinale, tax partner at EisnerAmper and Allie Colman, senior tax manager at EisnerAmper.
Tom Cardinale: Thank you Niky. And good afternoon everyone. And thanks for joining to today's session. It's somewhat ironic that on election day we'll be talking about a topic that many politicians bet their careers on two years ago. And probably running on that again today, that being corporate tax reform. But no matter what happens to the balance of power after today, the items we will be going over will largely be intact for at least the next few years. The corporate tax reform provisions were written and is permanent, use that term loosely in tax reform that usually means just until the next president.

Tom Cardinale: But ... so we're hoping today will be more of a refresher to the corporate tax changes that was overhauled last year along with some tax provision considerations for your financial reporting compliance. I'll warn you in advance that some areas we'll be discussing could be an all day seminar in itself. So we'll just be giving you the high level points on it, some mind joggers and in the middle of it some planning ideas.

So our topics for today, we're just going to go a brief overview, spend a few seconds on that, on tax reform. Then we're going to go through some of the specific corporate tax reform provisions and then operating losses, depreciation, meals entertainment. Funny enough, that's been one of the areas we've probably been fielding the most questions on. I would going over the new interest expense deduction limitations, which is much more wide-reaching and hits pretty much the ... almost all businesses that are leveraged.

Executive compensation, which is still more of a public company rule but there was some drastic changes to that. We'll be going over touching on some international foreign provisions, which many believe were probably some of the thickest areas of tax reform that's going to lead to much more burdensome compliance. And then we'll finalize with some state tax considerations and how they're coping with the federal tax reform provisions.

And lastly we'll just go on a few provision planning ideas and updates on how tax reform impacts your tax provisions. So just the intros, you know at the end of last year, the president signed the Tax Cuts and Jobs Act. We'll refer to it as the act or TCJA in this program, has just amended the tax code for the first time in 30 plus years and it generally became effective in January of this year. However, as we go through the program, you're going to notice a couple of other dates that may come into play on the effective date of the provision.

One of them being September 27, 2017 that's when the tax reform framework was made public. And then on November 2nd, the house bill was introduced and one or two provisions were actually effective on that day. So before we start the program, we might as well start with easy polling question. Before tax reform, what rank was the US corporate tax rate among economically developed nations?

So underline that. Were we first, second, third, or fourth ranked highest? Please make your selection and keep in mind you're not getting graded on these. This is just to see you're here and you must answer three of the four polling questions.
Moderator: We'll give you five more seconds to answer. We are now closing poll and sharing the results.
Tom Cardinale: So most of you got the answer right? We actually were the highest among economically developed nations that maybe was the zinger of this question. If you included all corporate foreign nations that had a corporate income tax, we were actually third behind Puerto Rico and United Arab Emirates. But for this question, that is correct. So I'm going to now pass it along to my colleague Allie Colman, senior tax manager at our firm, and she's going to take us through the changes in net operating losses.
Allie Colman: Thanks Tom. Good afternoon everyone. So I'll be talking to you about as Tom said the changes to the regulations on net operating losses. So for law net operating losses that were incurred in tax years beginning before January 1st, 2018, so under the old law, it had an ... NOL had an expiration period of 20 years. You could use your NOL to offset 100% of your taxable income. You had to use your oldest NOLs first and you were allowed to carry back your net operating losses.

However, even though you were able to offset 100% of your taxable income with your NOL, there was alternative minimum tax implications potentially of doing that. So even though you were able to offset 100% of your regular income, you could still have had a tax liability as a result of AMT. Under the new law, the expiration period is indefinite. So for ... again and I want to reiterate. If for tax years beginning after January 1st, 2018, you had an indefinite carryforward for NOL.

You can only use these NOLs to offset 80% of your taxable income, but there is no longer AMT. So you'll see that there's a little bit of a balancing out because that provision was repealed. The first one first out usage is still the same and the regulation regarding carrying back year NOLs no longer exist. This is just a brief example. If you have a $1 million net operating loss carry forward from 2018 and your company generated taxable income of $600,000, you can only offset 80% of that $600,000.

So $480,000 which results in net taxable income of $120,000. With the new corporate tax rate of 21%, you would be left with a corporate tax liability of about $25,000. So as I mentioned, the provisions for the NOL carryback were repealed. There are some exceptions, I haven't really seen them but with the farming business, you can carry back your NOLs for two years and insurance companies, you can still carry back your net operating losses.

One thing I just wanted to mention was for companies that are currently undergoing 382 studies, 382 is when you have a greater than 50% change in ownership of the company. There could potentially be net operating loss carry forward limitations. For losses that are generated after January 1st, 2018, those NOLs do not expire. So, although you may end up with a limitation, the need for evaluation allowance because of potentially expiring that operating losses is something that should definitely be re-evaluated. And now we'll pass it back to Tom for some depreciation.
Tom Cardinale: Thanks Allie. So moving on to cost recovery depreciation. This is definitely one of the playground areas of politicians because they could sell it as a tax cut depreciation. But in the end it's a tiny difference. But in the end it's about spurring investment. We own our capital, more equipment, expanding businesses. So the Tax Act did greatly bolster, used to be a ritual where it was a one or two year extension.

So, but in this case, the bonus depreciation provisions were extended through 2026. So we'll go over a slide. How that works by year. Increased section 179 expensing. So that's on top of the bonus, allowing direct write-offs of a tangible business property and even some qualified improvements. The luxury auto limit, if you have a personal vehicle that you use in your business that's called listed property, you could use it personally in your business, greatly increase the depreciation deductions on your auto.

And more importantly, the expanded definition of qualified improvements. There used to be this huge definition of what is a qualified improvement, there was qualified retail restaurant improvements. Now they made it all one category of qualified improvement property. And if it meets the criteria, you would also be eligible for the new bonus depreciation.

So bonus, as you can see, and there's that weird starting date again which was the tax reform framework release date. If you placed in service equipment from September 27, 2017, you could see for the next several years, 100% bonus depreciation will be allowed. And then as you could see, it scales down 20% per year in the following years. As we practice tax law ... any of these provisions lasting this long is pretty rare. Don't be surprised if this changes. It could be made permanent. It could be repealed, but at least we know over the next several years, you got 100% available for writing off assets.

The question we field often is what qualifies for bonus? Everyone wants to qualify their assets for bonus. Probably the guiding principle is that it's a recovery period of 20 years or less. You could look at publication 946 if you need guidelines of where your property lands because there is an index in the back of publication 946 that'll show you. But 20 years or less is usually the guiding principle.

Qualified improvements, which we're going to talk about in a separate slide. Computer software. Computer software qualifies, it's normally three year property, three year straight line property, but that still qualifies. Where utility qualified film and certain long production property like aircraft not used in transportation is also qualified. Tax reform added in here just one item, brand new item, which was the qualified film TV and production costs.

So what are common disqualifiers, what usually trips up bonus where you have to capitalize it over it's useful life? Well, usually the building and the structural framework, like a commercial building, that's 39 year property, that's still an existence, elevators, escalators. Although you can make a case, say this is equipment, part of the building. No, it's really a structural component. So that's going to fall in the same category as the building framework.

If you have a new expansion to an existing building where you're growing the boundaries of your building, that's also considered part of the building, it wouldn't be considered an improvement. So that would not qualify. Residential property, if you're leasing residential property, that's 27 and a half years. So right there you're over the 20 year life, you can't qualify bonus on that. And if you have the deposits or you receive a property but it's not placed in service, you can not claim bonus.

So you can't put $1,000 down payment on a piece of equipment just to beat a time deadline to get bonus. And then it's placed in service down the road when it's not. It's an on one. There is a special contract rule where if it's an irrevocable state law contract and you put that deposit, you still have the place in service rule. But where the contract helps you is that if let's say bonus is expiring in 2019, next year. You sign that contract by the end of 18, they will allow you that bonus because it's expiring in the next year.

That's the only instance where the contract rule would come into play and help you. Otherwise you have to place it in service. So this was the big change on depreciation for bonus is that previously before the act, you could only use bonus depreciation on new or original use property. They now amended the acquisition requirement to basically say you could apply bonus depreciation on used property. And that's very, very big. So you got property can't be used by the acquirer in the past. So you can't just keep repurchasing the same asset and it can involve exchanges between related parties.

That's kind of self-explanatory with the family groups that may have several entities, you don't want them purchasing, basically profit shifting among each other. So there is a requirement, you can't have that but for the used property. So just expanding on that new change with used property bonus qualified, this is now had an impact on the merger and acquisition community and negotiations between buyer and seller.

Normally buyers ... based on my experience buyers normally want to have an asset deal in place where they can get a step up in the basis of the assets. So now that used property is allowed for bonus, you could have venture capital groups, PE groups coming in wanting to allocate a lot more to the fixed assets and less on intangible assets, which normally have a 15 year write-off. And the motivation for that is they can get 100% bonus in year one on the amount they allocate to the fixed assets. But you can't take the bonus on intangibles.

But what's the seller preference when they're selling their assets? They're going to want more toward intangibles because they're considered capital assets, which if it's a flow through entity, it could be taxed at only 20%, a federal rate and less on the fixed assets. Fixed assets still and tax reform did not repeal this unfortunately, when you have a gain on fixed assets, there is a mechanism called ordinary income recapture. Meaning because you enjoyed ordinary depreciation deductions on those fixed assets, you need to pay an ordinary rate, which could be up to now 37% on the gain on the sale of those assets.

So a seller preference is going to be put as much to Goodwill and intangibles as possible and less toward gain on fixed assets. Then moving on to improvements, again as I stated before, tax law had three different variations of improvements. You had qualified leasehold improvements, retail improvements and restaurant improvements. A lot of them had parallel criteria. It seemed to be more redundant than anything.

So as part of tax reform and even a piece from the PATH Act two or three years ago before that, they consolidated all of the improvements into one category now called Qualified Improvement Property. Now the good thing about here is it's extremely ... the rules are more relaxed than it was previously. Used to have ... you needed a lease. You need a lease agreement among the parties to get a qualified improvement qualification. You no longer need that. So if you own your property and you have qualified improvements, interior improvements, you can qualify for bonus.

In the past, you also ... the building had to be at least three years old. So now it can be any building. Brand new, one year, two years old and if it's internal, you're going to have a qualified improvement. The last thing became more of a gray area that became a fight with the IRS and taxpayers is how ... what common areas are considered structural components of a building. And the ones that came up most often are roofs, HVAC systems and general building systems, security alarm, fire systems.

And it was back and forth. So they decided to write into the regulations that these items are now considered qualified improvement property, which is a good sign because now it could qualify for bonus. So again, the key thing about Qualified Improvement Property is its class life. It's 15 year property. And as I stated before, the guiding principle of bonus is that it's 20 years or less of a class life. QIP, Improvement Property is 15 year.

However, we ran into a bit of an issue. Congress failed to write the new 15 year class into the tax code. They wrote it in their committee report, which is kind of a reconciliation of the congressional and Senate bills. They said, "We will create a brand new 15 year class for qualified improvement property." But they did not. And as of today, still it is not written in the code. What's ironic is that the IRS ... IRS actually publish what they call a fact sheet, that the 15 year is in existence.

So, although if ... So if you decide to apply the 15 year, you can make a very strong case that the IRS is not going to charge you a penalty if they remove it because they even wrote their own fact sheet that's in existence. But the goal is to .... or the message to convey is that you exercise caution here, there is talk about it, new tax bills, tax reform, 2.0 has been talked about. But they do need a new bill to put this 15 year correction back in. So we could officially apply this.

So just exercise caution in this area, but it should happen sooner or later that they get this 15 year provision in. Section 179 was also expanded. It may seem more like a fifth wheel now because bonus can apply ... used and new property but you also have to think of state considerations too which Allie we'll go over later. That's also effective January 1st of 18. It's similar to bonus, you get a one year write off.

They increased the first year write off to $1 million, used to be 500,000 plus some inflation adjustments. And the phase out will begin at $2.5 million of qualified additions, and then it's a dollar for dollar reduction of 179 from there. So at $3.5 Million, you have no benefit. But the taxable income is still in place for 179. You cannot take 179 into a tax loss for your company. That's a big differentiation for bonus depreciation.

You could take as much as you want with no limitations on bonus and you could drive a bigger loss, but you do need a taxable income cushion for 179. And there's currently no phase out schedule. So this is written in the code as of now, as permanent along with cost of living adjustment increases. So there'll be some inflation adjustments going up 2 or 3% a year. So next year will be a little over a million, a million 30 perhaps. So this is just another weapon at your arsenal for writing off expanding depreciation deductions.

And the annual depreciation caps were raised for luxury autos. For those of you that have done depreciation schedules, you'll know that in the past, once you hit year five and longer of recovery period, your write off even if it was a brand new Lamborghini would only be $1,775 a year. That would be your deduction limitation on depreciation.

So as you can see in the fourth year and beyond, they almost tripled that to almost $6,000. And that's just the normal depreciation. You are allowed an additional $8,000 first year only, on depreciation for qualified listed property, and that's extended for the next eight years also. So in essence, if you take the first year of service with the 8,000, your max depreciation on a listed auto would be $18,000.

So we move on to our next polling question. What is the overall projected cost of the Tax Reform Act over the next decade?
Moderator: Please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions.
Tom Cardinale: And your last choice there is for the doctor evil fans. I'm going to guess we're going to get 5% on that one. What do you think Allie? We're going to get some people on that one.
Allie Colman: Yes-
Tom Cardinale: You cannot get this wrong. And while you're answering this question, I'll field a quick question we just got. Internal structural improvements are 15 years property for qualified improvement or I guess it was are internal structural improvements 15 years qualified improvement property? The answer is yes. As long as you're not changing the framework of your building, you're not expanding it and not basically altering the dimensions of your building capacity. So drop ceilings, new offices, internal offices, flooring, new walls, all that would be qualified 15 year.
Moderator: I'm going to close the poll and share the results.
Tom Cardinale: That was cool. They got 5%. 6% said it. So all only a quarter of you got this right. The actual cost, then they had to get it here was $1.55 trillion. It had to be at this point or lower. Otherwise they had to go through the normal Senate rules and break the filibuster, which requires 60 votes. So because they used I guess a budgetary trick, it had to be under 1.5 trillion to get the tax reform passed.

We're going to move onto the next topic, meals entertainment. Again, this was one area that we fielded a ton of questions on and it's not surprising because you can run into hundreds of different scenarios of what would be qualified 50%, what would be zero, what would be 100%? So January 1st of 18, and this is a hard cutoff, so if you're a fiscal year company out there, you need to be tracking these new tax deduction rules for meals entertainment now.

So you may have a split off for your first fiscal year 18 return. So the big change here was that entertainment pretty much in its entirety is now 100% non-deductible. Used to be 50% if it was for business reasons. As always in tax law, we will go through a few exceptions, but that's just the general rule on entertainment. It's now 100% non-deductible.

And the other changes that nearly all types of business meals are now 50% deductible. Now you may have said well it was already 50% deductible, no change there. But the problem is that there were actually several categories of meals and meals costs that were 100% deductible. But unfortunately that has now been cut to 50%. So we're going to take you through several examples of that. And this is just a comparison of the old law and the new law.

The old law above, you could see that if you provided meals to your employees for the benefit of the employer, like overtime meals, people working late, or even just set up food in a kitchen, local area, that was all 100% deductible. In house cafeterias, break rooms, the same thing. So now the new law, all those above items are only going to be 50% deductible, those meals costs. And unfortunately the way it's written, beginning in 2026 that's has to be zero.

So in along with entertainment, some meals like this would also be 0% deductible unless it's changed down the road. So just to take you ... and these are some of the exceptions I talked about, there's always exceptions to tax law or one provision of it. So what I did here is we put together a box of eight categories where the M and the Es, the meals entertainment and you could see what represents the amount deductible. So you could see expenses treated as taxable comp to employees, that's an easy one because they're treating it as ordinary income if you're putting it on their W2.

So both meals and entertainment that is taxable to an employee would be 100% deductible. Meals provided for the benefit of the employer, we talked about that used to be 100%, now it's 50. Now the good news is that recreational social events for your employees like holiday parties or just gatherings, as long as everyone's invited and they're not specific to highly compensated executives, that is still 100% deductible for both the meals and the entertainment. So that did get saved even though initially that was slated to be cut also.

Goods and services made available to the public when they give out samples, that's 100%. So the customers, that's of course the trader business exception, like restaurants, board of director meetings, meals used. Believe it or not, the entertainment is 100% deductible for board of directors meetings. So that could be useful for Under Armour. If you read the news lately, I won't say anything more than that and 50% meals.

If you're a professional chamber or qualified professional, not for profit, 501C6 chambers, business leagues. So the entertainment, again there is 100% still deductible, but the meals at 50 and reimburse meals, entertainment to your employees is still 100% across the board. So I'm going to pass it off to Allie to give us a few examples of scenarios you may see in meals entertainment.
Allie Colman:Yeah. So the next three slides are going to be charts like this that indicate different examples of types of meals, travel, entertainment expenses you may be incurring along with whether or not those expenses are 100%, 50% or 0% deductible. So Tom really touched on some of the major ones that I think are impacting a lot of our clients and impacting EisnerAmper as well. So most importantly, I think the dinner for employee working over time. Those used to be considered costs incurred for the convenience of the employer and used to be 100% deductible. But now those costs are only 50% deductible.

The way to get around that is if you include in your employee's wages, the cost of those meals. I don't foresee a lot of companies going down that route, but it's an option. Something else to point out is that because a lot of the entertainment expenses have been cut to 0% deductible, some companies got rid of their sports boxes and haven't been able to give their employees as much of the fun stuff if you will than they used to.

But the holiday parties and employee recreation are 100% deductible, so everyone can make it up to their employees over the next few months and throw one great holiday party. So again, we were just discussing a lot of the meal expenses. If no business is discussed, it's not going to be deductible, that's the general rule. If you're traveling, this I thought was interesting. If you are on a road trip and you don't discuss business and you're with a client, your meal is 50% deductible, but your client's meal is not deductible.

So that'll definitely be interesting. I'm sure inputting expenses is going to get much more detailed than it had been previously. And then this just emphasizes that entertainment expenses are really not deductible anymore. I know a lot of companies have been asking for example the changes in policy language, so this I think has caused a big issue. A lot of companies are doing meals and entertainment expense analysis right now. And it's definitely important because I feel like it's an easy item for the IRS to inquire about when they come in for an audit. So with that, I will pass it back to Tom to discuss some interests.
Tom Cardinale: Thank you Allie. So interest expense. This is again one of those provisions that really was normally relegated to very small, I would say less than 2% of the business community because it's centered around earning stripping provisions, meaning it would be the deduction on the US side, but not taxable on the income side because it may have been a foreign entity or some entity that's not subject to income tax in the US.

So that was the earning strippings provision. They pretty much wiped that all out. It's all gone. And now it's become basically a uniform calculation limitation that can apply to just about every kind of business. So now there's an annual interest deduction limitation, which cannot exceed the annual business interest income. So you create net interest from that. So if your interest income outweighs your interest expense, you're fine. Assuming you don't and you'd say you'd just had interest expense, then it's going to be 30% of your adjusted taxable income, which we'll go over in a minute. What's adjusted taxable income?

Floor plan financing for auto dealers, that's still in tax. So you can still deduct that. Any interest that say becomes non-deductible, it's an automatic carryover, indefinite carryover and treated as paid or incurred in the following year. So this could lead to a substantial kind of snowball effect build up, but at least you know there's an indefinite carryover of that amount. The small business exception, and this actually applies to several areas of Tax Reform. The old rule of what was considered a small business was around 10 million of average gross receipts.

Now that's been increased to 25 million, three year average gross receipts. So if you fall in that category, this 163J limitation that we're going over will not apply to you. So what is adjusted taxable income? So it starts with taxable income on your corporate return or business return, but without the following, non-business related income deductions, that could be like investment income, things like that. Business interest expense and interest income. You're adding that back, the NOL deduction you're adding back. If you happen to be a qualified pass through entity and you had a 20% pass through deduction, even though that's on your personal return, that would have to be added back. And then your tax depreciation and amortization is added back.

So what you up getting is a beefed up taxable income number that's very close to EBITDA, but it's just a tax version of EBITDA because you're using tax depreciation. So when you think about that and you're taking bonus, you could actually wind up having pretty big pool which could expand your 30% limitation pool. So that's an area that could help that a little bit. So as I stated, the prior earnings stripping rules are repealed, the use of all these criteria of debt to equity ratio, if it was one and a half to one and you pay certain interests to relate a party that wasn't subject to or was tax exempt for US. That's when you had this old 163J rule.

So that is all gone and it's just this flat 30% of adjusted income test. Certain businesses are exempt, outside of the 25 million small business rule, if you're a regulated public utility or certain real estate businesses, not surprising real estate was in here, has an exemption to it. So if you're in development, leasing, construction, any real estate business, you are also not eligible for this limitation so you could deduct interest in full.

All right? Being that it's election day, we thought it would be appropriate just to field some opinions or what you think is going to happen after today. So the congressional balance of power, what do you think it will be after the election? Let's take your pick out of the one of the four choices and we'll give you about one minute.
Moderator: And please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions. We'll give you another five seconds to answer. And now we are closing the poll and sharing the results.
Tom Cardinale: All right. Pretty diverse answers here. Majority of you think the Dems will take the house, GOP maintains the Senate. Some of you ... 17% think Dems will take both the house and the Senate. So we're all over the place. Why don't we ... painted the question good there. We'll see what happens. As Trump says, we'll see what happens. All right, so next topic. I'm going to pass it back to Allie who's going to go over a big provision on 162M, Executive Com.
Allie Colman:So thanks Tom. I'm going to be going over some of the changes to the Executive Compensation. What we call 162M. Again, this provision mainly applies to public companies. There were some provisions in the Tax Cuts and Jobs Act that could have some private companies subject to it, but mainly this is a public company provision. So the old rule that's still in effect is that there's a $1 million compensation limit for certain officers and employees of the company.

Prior to the Tax Cuts and Jobs Act, there was a provision that said any performance based compensation was not included in that $1 million limitation. That is huge and that was something that was removed. So when you're looking at your 162M computations that you definitely ... now all of your performance based compensation bonuses are going to be subject to this limitation. They expanded the definition of a covered employee, meaning who would be subject to this limitation. And then there are some grandfather and transition rules.

So as I said, all performance based compensation is now subject to this $1 million limitation, bonuses, commissions, stock options, investing shares. All of those are going to be now included in the limitation. So another thing to point out is under the old rules, CFOs were excluded from this million dollar limitation. And now they specifically stated that the CEO and CFO both must be included in your 162M computation.

So similar to ... well this is something that was addressed in a recent notice that was issued over the summer, Notice 2018-68, the employees that are going to be subject to this limitation are not necessarily the same employees that are going to be listed in your FCC filings. So this bullet point is a little bit misleading, but I definitely want to say that in Notice 2018-68, it explicitly says that the covered employees do not necessarily have to be listed in your FCC filing.

In addition, there is no end of year serving requirements. So we used to ... if you had a CEO that retired in the middle of the year, you could have been able to exclude their compensation from this computation. However, now that's not the case. So they say once you're a covered employee, you remain a covered employee. So if there's pension, severance, all those things that you thought you may be able to deduct, that's something that definitely needs to get reexamined.

So the transition rule, also known as what I've been calling the grandfather rule, is if you had executive compensation or stock compensation policies that were in effect on November 2nd, 2017, and there were no material modifications to those plans, the compensation issued under those old plans would still be deductible and would not be subject to the $1 million limitation.

So what is a material modification? So any upward adjustment, acceleration or deferral of compensation except for cost of living adjustment increases, and a contract that's cancelable by company authority after November 2nd, 2017. If an employee can cancel, that's okay. But if the company has the ability to cancel, then that is considered a material modification.

There are a lot of things that my clients have been asking me about is how this is going to impact their deffered. So for public companies that have staff compensation deferred, if you had outstanding options that haven't been exercised or restricted stock that has not invested for your CFO, and you thought that those deferred tax assets were good because the CFO wasn't subject to 162M, well now that's not the case.

So this year when everyone's going to be filing their 10K's and looking at their deferred, you need to look at your CFO's outstanding stock compensation to see if those will remain valid deductions going forward. Or if now the CFO's salary is going to be limited due to these changes in provision. So now the international provisions, which is definitely a hot topic around here.
Tom Cardinale: It certainly is. Thanks Allie. And as I talked about it at the beginning, this is one area where it could definitely be an all day seminar. I'm only going to go over some high level areas of the farm provisions of Tax Reform and how that's impacted in the current year. Because we have had some aftershock effects, possibly unintended, but they're looking at ways to fix them. So the 965 which is the redeem repatriation that everyone should be aware of by now. There came the question, well if you had an overpayment on your tax return because you wanted a healthy cushion to say apply to Q1 of your 2018 year. How does that impact 965, especially if you elected to pay it over an eight year installment.

So the IRS came back with a hard position saying, well we have every right to take that overpayment and apply it to your unpaid section 965 liability. And that's creating a huge issue amongst some taxpayers, especially with cashflow issues where they paid it with the hope that they would have to supply it to their income tax payments for this year. And now I don't know if this is going to come in the way of automatic IRS or correction, the IRS says they have authority to reclass that to your unpaid 965 liability.

So there is a big fight in the community on this. There's a lot of legal and tax groups challenging the IRS. The IRS is claiming authority under 6402 and 6403 which basically says that the IRS can reclass from one tax lien to another or from one liability to another at its own discretion. But the outside groups and they all are making excellent petitions and good comments that this is going against the intent of lawmakers. In the end, you want intent, substance over form on what the eight year installment option was meant for.

So this is going to hurt small business and their cashflow if they're going to force them to pay this by taking their overpayment. And on top of that, one of the provisions under 965H4 explicitly writes that the eight year period is a fixed timetable for shortfalls, but they don't talk about over payments. But you can make the case that if what they're talking about it's a fixed period under a shortfall, why couldn't it apply to over payments? Meaning you could just continue to not apply or at a minimum, if you have an overpayment, just apply to what you owe for year or two of the 965, but still keep the eight year payment intact, and the fixed payments intact.

So that's still being fought. There's been no updates recently. But just be mindful of that. If you do have a 965 liability and it's unpaid and you have an overpayment, don't be surprised if you get a notice from the IRS trying to apply that to your outstanding 965. So the real bane of Tax Reform I think can be widely shared at least in EisnerAmper and the tech group is this new global intangible, low tax income, GILTI.

So we could probably run a separate one hour seminar or a better name for this, but that's what they came up with. And again, we're just going to touch what is high level aspects of it, things to be aware of. So if you have a CFC, a Controlled Foreign Corporation which is over 50%, if not at 50%, if you have a Controlled Foreign Corporation and you have a US shareholder, there's a new mechanic that's basically forcing the US company. It's almost like a diem flow through of certain income from that foreign corporation is being taxed subject to income and tax in the US.

So just to give you a brief example, you have $1 million overseas, let's say in an Ireland company, and you have a 100% parent in the US. That million dollars, assuming that the company is a C Corp in the US would first be subject to a 50% deduction. So that's something that gives it a bit of a haircut. So now you're left with $500,000 of income that is subject to US tax. And then after that you're allowed a foreign tax credit up to 80% of the creditable foreign taxes of the CFC.

So if you're ... and using kind of an iteration calculation, if you're in a foreign country, the tax rate is little over 13%, you're very likely going to wipe out the GILTI impact. But only if you're a C Corp. So we put it through a little planning point or in here because at this new 50% deduction, which is section 250 is not available to pass through entities. So if you currently have a pass through entity that owns a CFC or a foreign corporation, and if it's a profitable foreign corporation, you definitely want to consider a blocker Corp or putting a C Corp kind of in between, make the C Corp blocker owner of the parent, I mean owner of the CFC and then you would have the existing US company owning the new blocker Corp.

Because that way you would enjoy the 50% deduction and the foreign credit, the C Corp foreign tax credit. So this has been just a gigantic provision, a lot of planning ideas out there right now on GILTI. But ... and these other components we'll go over to Section 78 gross up is based on 100% of the taxes that they treated as GILTI and eligible for the GILTI deduction.

So this is on top of the 50% deduction that you get. You could also get a deduction on your Section 78 gross up, which is kind of a wash because you have a Section 78 income inclusion. This is a key for the foreign tax credit computation itself is that the GILTI is basketed in its own a pool for foreign tax credit purposes. Meaning you cannot take an existing carryover that's in another bucket, let's say a passive bucket and just apply that available credit to your GILTI.

You can't just crossover and use all available credit carryovers. So GILTI is kind of its own animal for both tax pools and the computation. And there's no carryforward or carryback available for any excess credits. Well that's GILTI. So with Tax Reform you were going over a lot of the federal provisions, but now what's become a bigger story lately is how our state is going to be treating this on the federal provisions. How are they treating it for state purposes? And I'll kick it back to Allie.
Allie Colman: Thanks Tom.
Tom Cardinale: Go over that.
Allie Colman: One thing I did also want to mention about the 965 overpayment is because of the change in tax year, the extension and the first quarter estimate are due on the same day now. They're both due on April 15th. So a lot of companies that used to pay a separate extension and estimate are now making their payments together. Which is causing such a large overpayment. So if there are any companies that had repatriation tax in excess of their overpayment, it's definitely important that even though it's more administratively annoying, to make two separate payments, one with your 7,004 for extension and another for your estimate.

So jumping into state taxes, Tom alluded to this earlier about bonus depreciation versus 179. Either way you're getting an immediate expensing of your capital expenditures in the year. However, a lot ... most States have decoupled from bonus, meaning that they do not allow it. And a lot of the States where our clients file, New York, Pennsylvania, Massachusetts, they all allow Section 179. So you may want to look at the state you're filing in and the States where you have the largest tax liability to determine whether or not bonus or a Section 179 makes the most sense for your company.

GILTI. So a lot of States have not yet come out with specific guidance addressing GILTI. New Jersey was so kind to issue their 965 regulations on I think it was October 1st and even said that if companies did not follow those rules and they already filed their New Jersey return to go back and amend it. So we do not have specific guidance yet, but as the way it stands now, New Jersey and New York both follow federal where you have a GILTI income inclusion.

The New York has with ... you do get the 50% deduction. But New Jersey right now is without the 50% deduction. After speaking to our state and local group, the big thing that's outstanding is whether or not New Jersey is going to say that the GILTI inclusion is considered dividend income because then you would be able to get the dividends received deduction. I'm going to talk about the New Jersey law changes in a minute, but because the dividends received deductions is no longer 100% in New Jersey, you may still end up with some tax liability as a result of GILTI in New Jersey.

Pennsylvania follows the federal income pickup as well. They allow a partial deduction for the Section 78 gross up, but as of right now, and we didn't see anything that addressed the 50% deduction that the Federal return allows. So another thing to point out is most States do not have foreign tax credits. So although maybe from a federal perspective, you'll be generating a foreign tax credits to offset your GILTI income. So you're thinking to yourself, it's not really going to be a big deal, but for state purposes that foreign tax credit doesn't exist.

So it's definitely important to keep up on the state regulations as they come out to see how this is going to impact your state tax filing. I just wanted to address the interest limitation because this is something as Tom said, that impacts most companies because New York, New Jersey and Pennsylvania use their federal taxable income as a starting point, they're going to conform to that 30% federal limitation.

So New Jersey, I know this isn't really tax reform related, but still something that Tom and I wanted to discuss was there was an overhaul of the CVT. Some high points that we've taken from this is that there's now going to be a surcharge for tax payers that have allocated income greater than 1 million. So that's definitely important. It's going to be after apportionment so that $1 million, if your company has allocated income in New Jersey over $1 million, they're going to have an additional surcharge of 2.5% for 2018 and 2019.

For 2020 and 2021 that surcharge gets reduced, but it's still there it's 1.5%. The dividends received deduction, as I just mentioned, used to be 100% for New Jersey, but now is only 95%. So now if you had intercompany dividends, it didn't really impact your parent company, but now you don't get the dividends received deductions of 100% anymore. Similar to what New York did a few years ago, New Jersey is going to have their NOL carryforwards be post apportionment now.

I believe they're still coming up out with guidance of how you're supposed to compute your historical years and convert tax as opposed to apportionment. And then combined reporting. So New Jersey always used to be one of those separate company States, but now starting January 1st, 2019 it's going to be combined reporting. So when you're doing your 2018 10K filings, your deferred tax rate is likely going to be impacted if your company has nexus in New Jersey.

Again, and something that just to not forget, New York city apportionment. It used to be a three factor apportionment, in 2015 they announced that they were going to be phasing into a single sales factor and in 2018 it's going to be the first year that it's fully 100% single sales when computing apportionment. And with that we will go to- Our polling question.
Tom Cardinale: Good.
Allie Colman: So a fan favorite in this office, in game of Thrones, what was the title given to the person who controlled the Throne's finances and tax collection?
Moderator: And please remember that in order to receive your CPE certificate, you must remain logged on for at least 50 minutes and respond to at least three polling questions.
Tom Cardinale: While everyone's answering this question, we did get a few questions from the group. Interest deduction limitations. How will these apply to fiscal year taxpayers assuming 06/30/18 year end? The rule on the new 163J is it applies to tax years beginning after 12/31/17. So your period end June 30, 18 as you have in your question would not be subject to the 163J limitation. It would be your June 30, 19 year. GILTI question. Say you have an escort with a profitable CFC, but it is only profitable due to a transfer pricing adjustment. Is GILTI still applicable or is GILTI computed without any transfer pricing adjustments?

So that's a great question. The GILTI income follows a provision of what is considered tested income. Tested income includes any properly allocable deduction. I would think intercompany fees would be a properly allocable deduction if it's at an arm's length. And I do know things like Subpart F income and intercompany dividends are excluded from the GILTI pool. But I would think intercompany fees, even though they're subject to a transfer pricing adjustment, provided I would think you're getting the deduction benefit on your US side, I would think that would be allowable.

And I've one final question. What sections should you look at for aggregation with respect to the 25 million rule? For example, fun structure with blockers and partnerships. As with any limitation laws, yes, there is an aggregation rule with this 25 million small business tests. I would look to Section 448, the same provision that explains the 25 million. There is an aggregation test.

I can tell you that there is a one employer rule, meaning if you have a bunch of companies fund companies underneath the master company, but it's still the master company. That's basically the paymaster. They would all be taken as one unitary company for purposes of the 25 million tests. There's some other tests involved, I'm not too sure of those. But check Section 448 for the aggregation rules.
Moderator: We're sharing ... closing the poll and sharing the results.
Tom Cardinale: All right. How many game of Thrones fans do we have? Wow. Not too many. I thought this would be 90%. The correct answer is Master of Coin. 44% most of you got it right-
Allie Colman: Still majority.
Tom Cardinale: It's till majority. That's good. So pretty good though. Have some fun at least with this. All right. So on these last few minutes everyone, we're just going to touch on some provision updates. How does tax reform impact provisions? Again, very, very high level. How this impacts your financial reporting. For one, where everyone's happy about the 21% fixed corporate rate and came a question early on, well how do you treat that for your fiscal year companies? And the short answer is use a pro rata straddle computation.

So as an example, if you're a September 30 fiscal year end, you're going to be applying a 24 and a half Federal rate to your Federal provision plus State of course. So you have to think about book to differences on provisions. What's changing from tax reform? Well, we certainly got this new 163J limit that could impact a lot more companies. It's not going to be just on the earning stripping companies and foreign or disqualify guarantees of foreign parents. It's going to apply it almost everyone that's leveraged.

So you've got that to consider as a potential deferred tax asset. Because it would be a deduction limitation in the current year. GILTI inclusion, if you've got GILTI inclusion. You could have a new deferred tax asset, right? A previously taxed income, you're getting hit with it now, but as you repatriate that money for real down the road, you'd be reducing your deferred tax asset. So you got to think about GILTI, Allie went over in detail, the meals entertainment, you could essentially have now three M1s, tax adjustments for your meals entertainment, 100% allowable, zero and 50.

So think about that especially if you're a fiscal year company, because you do have to do a carve out or bifurcate your GL into those amounts. And of course the 162M adjustment, you could have a potential removal of that or if there's stock option compensation, you could have some carry over on your deffereds in that area. So as Allie mentioned earlier, the corporate AMT is repeal. So that's one thing that we're happy to see. You don't have to track that on your provisions any longer going forward.

If you do have an AMT credit still available, that is I think over the next couple of years, allows you to monetize it until 2021 or 22. And then the remainder would be refundable. You got the repeal of Dean Foreign Tax credits. So if you have that as part of your foreign taxes, you no longer need to compute that going forward. Direct foreign tax credits are still available on your withholding. The small business definition we touched on, you're changing the 25 million from 10 million average gross receipts.

So for those of you that have inventory out there, you had to go through this arduous calculation called 263A. So if your business falls under the 25 million that could be potentially removed. You would basically just reverse your prior year ending adjustment and you could wind up closing out your deferred tax on that area and the 163 J interest exemption. State impacts, we always talk about state impacts. Allie touched on it. Always, always, always revisit your top States, your domiciled state. It seems like States are changing every year, changing their tax rate, changing the revenue apportionment sourcing, market-based customer performance. They're going crazy right now.

There's an acting legislation right now in New Jersey, in New York about what do we do with GILTI? Can we, let's change it. Let's decouple from this, but not that. Just pay attention to the state impacts from all these tax reform provisions. They're going to keep coming in all the way through filing season into 19. So be aware of that.

And lastly, we'll just touch on this concept of ... if some of you haven't heard of the term naked credit, this basically comes to provisions that are fully reserved for your deferred tax assets and it relates to indefinite less lived intangibles such as Goodwill, where tactically for book purposes, it has no class life. It technically can last forever. But for tax purposes, you get a 15 year write off. So because it's indefinitely lived, that's going to create a growing deferred tax liability right on your balance sheet that you're not allowed to reserve against.

So this is almost been for several years, it's own kind of its own animal that we've had to deal with in financial reporting. So you're left with this credit on your balance sheet for tax liability. So now post tax reform, since new NOL generated have an indefinite life for 20 years, you tackled ... you make a case, this is a naked debit. This could offset it, but you got to remember that you can offset the naked credit but not over zero.

So you can't be left with a net deferred tax asset because you have way too many new NOLs to offset the naked credit. And then you have to consider the 80% limitation as Allie talked about earlier. You cannot use 100% in any given year. It's 80% for the NOL usage. So it's giving you one is as easy as I could an example of how the naked credit debit applies. So you have a full valuation allowance. Let's say it's a loss company. They have an existing $100 deferred tax liability from Goodwill. That's again the naked credit.

So in 18, remember and think new rules. Now we now have an NOL that has an indefinite carry-over. So they generated $300 of a tax loss. So what's the value of that loss? While we've got $300 times the federal corporate rate. So we have a non-adjusted deferred tax asset of $63 before the discount. But remember we can only use 80% of that. So that you apply the 80% and that's going to generate a naked debit of about a little over 50 bucks.

So we started the year with $100 deferred tax liability and now we got this $50 debit to offset. So you can see the disclosure result, you'd net the toe and that gets to 49.6. So let's go throw it out there. I know it's not going to apply to everyone out there, but it is brand new, kind of born from tax reform. So something to be mindful of in your provisions.

And with that, we're right at the end of our time. So unfortunately there's three or four more questions we won't have time to answer. I will be sure to send you an email on those. And I would like to thank everyone for joining. Thank you Allie for joining us.
Allie Colman:Thank you. Thanks everyone.
Tom Cardinale: Thank you Niky. Thanks everyone.
Moderator: We hope you enjoyed today's webinar. Please look out for a follow-up email with a link to the survey and presentation. If you have additional questions about today's topic that you would like to address, please feel free to email our speakers directly. For those who meet the criteria, you will receive a CPE certificate from EisnerAmperU@eisneramper.com within 14 business days of confirmed course attendance. Thank you for joining our webinar today.


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