The recent Tax Cuts and Jobs Act aka Tax Reform has made a significant impact on the tax situation of franchise business owners. Our slide deck provides the business tax and individual tax highlights of the Tax Cuts and Jobs Act for franchise organizations.

1. And the impact to
your franchise
Featured in Franchising USA magazine

2. AGENDA
 Individual highlights
 Business highlights
 Franchise entity selection
 TaxGap 2.0

3. INDIVIDUAL HIGHLIGHTS

4. INDIVIDUAL HIGHLIGHTS
Marginal Tax Rates
Married filing jointly and surviving spouses
RATE OVER NOT OVER
10% -- $ 19,050
12% $ 19,050 $ 77,400
22% $ 77,400 $165,000
24% $165,000 $315,000
32% $315,000 $400,000
35% $400,000 $600,000
37% $600,000 --
2017
RATE OVER NOT OVER
10% -- $ 18,650
15% $ 18,650 $ 75,900
25% $ 75,900 $153,100
28% $153,100 $233,350
33% $233,350 $416,700
35% $416,700 $470,700
39.6% $470,700 --
2018

5. INDIVIDUAL HIGHLIGHTS
Marginal Tax Rates
Married filing jointly and surviving spouses ($600,000 of taxable income in 2017)
RATE OVER NOT OVER
CUMULATIVE
TAX
10% -- $ 19,050 $ 1,905
12% $ 19,050 $ 77,400 $ 8,907
22% $ 77,400 $165,000 $ 28,179
24% $165,000 $315,000 $ 64,179
32% $315,000 $400,000 $ 91,379
35% $400,000 $600,000 $161,379
37% $600,000 --
2017
RATE OVER NOT OVER
CUMULATIVE
TAX
10% -- $ 18,650 $ 1,865
15% $ 18,650 $ 75,900 $ 10,453
25% $ 75,900 $153,100 $ 29,753
28% $153,100 $233,350 $ 52,223
33% $233,350 $416,700 $112,728
35% $416,700 $470,700 $131,628
39.6% $470,700 -- $182,831
2018

6. INDIVIDUAL HIGHLIGHTS
Standard Deduction/Exemptions
 $24,000 for married individuals filing a joint return
 $18,000 for head-of-household filers
 $12,000 for all other taxpayers
– Dependents subject to “Kiddie” Tax
• $1,050 or
• Sum of $350 and individual’s earned income up to $12,000 total
 $1,600 additional deduction for elderly and blind
 Personal/dependency exemptions reduced to $0

7. INDIVIDUAL HIGHLIGHTS
Itemized Deductions – Taxes
 Aggregate deduction for state and local taxes (e.g. income
tax, composite tax, property tax, vehicle tax) capped at
$10,000.
 Cap does not affect taxes paid or accrued in carrying on a
trade or business (Schedule C, E, F).

8. INDIVIDUALS
Itemized Deductions –
Medical
 Threshold on medical expense
deduction is reduced to 7.5% of
AGI for 2017 and 2018
 10% of AGI AMT threshold is
eliminated for 2017 and 2018

9. INDIVIDUAL HIGHLIGHTS
Itemized Deductions –
Charitable Contributions
 Maximum deduction is
increased to 60% of AGI
 Excess contributions
carryforward up to 5 years
 Deduction for any payment to
universities in exchange for
athletic tickets or seating
licenses is eliminated

10. INDIVIDUAL HIGHLIGHTS
Itemized Deductions – Mortgage Interest
 Deductible mortgage interest is limited to underlying
indebtedness of up to $750,000.
 Grandfather clause:
– The new lower limit does not apply to acquisition indebtedness incurred
before Dec. 15, 2017.
– Refinancing existing indebtedness does not disqualify the $1M limit as
long as the new balance does not exceed the amount refinanced.
 Home equity loan interest is no longer deductible.

11. INDIVIDUAL HIGHLIGHTS
Itemized Deductions – Miscellaneous
 All miscellaneous itemized deductions that were subject
to the 2% floor are eliminated
– Discussions needed with S-corporation owners and anyone with
significant unreimbursed employee business expenses
• Expenses may be able to be paid and deducted by the entity/employer.
• May affect compensation and expense reimbursement arrangements
 Overall limitation on itemized deductions is eliminated

12. INDIVIDUAL HIGHLIGHTS
Observation: With the reduction and elimination of many preference items,
AMT will affect far fewer taxpayers.
Exemption Exemption Phaseout
2017 2018 2017 2018
MFJ $ 86,200.00 $ 109,400.00 $ 164,100.00 $1,000,000.00
Single $ 55,400.00 $ 70,300.00 $ 123,100.00 $ 500,000.00
MFS $ 43,100.00 $ 54,700.00 $ 82,050.00 $ 500,000.00
Alternative Minimum Tax (AMT)

13. BUSINESS HIGHLIGHTS

14. BUSINESS HIGHLIGHTS
All Business Entities
 Cash method of accounting is now permissible for
C-corporations with revenues up to $25M (previously $5M)
 Accounting for inventories $10M threshold increased to
$25M (indexed for inflation)
 UNICAP threshold of $10M increased to $25M (indexed for
inflation)
– No change and still required for all producers and manufacturers
regardless of gross receipts
 Accounting for long-term contracts $10M threshold for
percentage of completion method is increased to $25M
(indexed for inflation)

15. BUSINESS HIGHLIGHTS
 Interest limitation to 30% of adjusted taxable income
– Only applies if gross receipts over $25M
– Disallowed interest can be carried forward indefinitely
– Does not apply to floor-plan
– Adjusted taxable income is taxable income without regard to depreciation,
interest income, interest expense, NOLs or DPAD
 NOL deduction
– Limited to 80% of taxable income
– No carryback but can carry forward indefinitely
 Like-kind exchanges
– Real property only

16. BUSINESS HIGHLIGHTS
C-Corporations
 Tax rate reduction for years beginning after Dec. 31, 2017
– Flat rate of 21%
– No special rate for personal service corporations
 Elimination of AMT for years beginning after Dec. 31, 2017

17. BUSINESS ENTITIES
Qualified Business Income Deduction
 The rules then exclude a ‘specified service trade or
business’ from QBI, but then allow such income to be
eligible for the 20% deduction for QBI for taxpayers with
taxable income below $315,000 for married filing joint
returns.
– For taxpayers with taxable income greater than $315,000, the 20%
deduction is phased out between $315,000 and $415,000.

18. BUSINESS HIGHLIGHTS
Bonus Depreciation
 Increased from 50% to 100% for assets placed in service
after Sept. 27, 2017
 Now includes new and used
 Cannot be purchased from a related party
 Phased out starting in 2023, sunsets after 2026
– 2023: 80%
– 2024: 60%
– 2025: 40%
– 2026: 20%
 First tax year ending after Sept. 27, 2017,
can elect 50% in lieu of 100%

19. BUSINESS HIGHLIGHTS
 Entertainment expenses
– Generally are no longer deductible
 Meals
– The general deduction allowed for 50% of business meals still applies
– Employer providing food & beverages on employer premises and facilities
• Prior to 2018: 100% deductible
• 2018-2025: 50% deductible
• After 2025: no longer deductible
– Company picnics and holiday parties
are still deductible

20. ENTITY SELECTION FOR
FRANCHISE OWNERS

21. BUSINESS ENTITIES
C vs. S-Corporation
 Each business will have specific factors to consider in the
choice of tax status of the business.
 The 21% federal C-corporation rate is an attractive rate.
However, where corporate profit is subject to a 21%
federal rate and state income tax, and then taxed again to
the shareholders as a taxable dividend, the combined tax
may approach 50%.

22. BUSINESS ENTITIES
C vs. S-Corporation
 Where the income is eligible for the new 20% business
deduction on Qualified Business Income (QBI), the
combined federal and state tax rate may be in the range
of 35%-40%.
 Where the income is not eligible for the new 20%
business deduction on QBI, the combined federal and
state tax rate may be in the range of 41%-46%.

23. HK’S TAXGAP 2.0

24.  Our professionals regularly see franchise owners
who didn’t get their full refund and are often
missing strategic tax planning advice that can
save them several thousand dollars.
 Certain tax situations make this more likely in
2018 as a result of the Tax Cuts and Jobs Act.
What is HK’s Complimentary TaxGap
Review?

25.  It is very likely with all these changes that
strategic advice, specific to franchise owners, has
inadvertently been overlooked, and you may not
have claimed credits and/or deductions that could
make a difference on your refund.
 HK’s TaxGap Review can assist franchise owners
to make sure nothing has been missed and they
are minimizing their tax liability as much as
possible.
HK’s Complimentary TaxGap Review

26.  Gather historical financial and tax information.
 HK’s national franchise group reviews financial
information.
 HK identifies and discusses planning
opportunities.
 Summarize potential savings in a follow-up
correspondence.
Optimize your finances with HK’s
Complimentary TaxGap Review

27.  HK provides franchise owners with access to a
free, independent and objective holistic review of
their current situation.
 Your results from the complimentary review will
provide a diagnostic of recommendations,
suggestions, cost savings identified, potential
compliance issues, refund opportunities, etc.
HK’s Complimentary TaxGap Review adds value

28. CONTACT
Ryan Hauber, Partner
888-556-0123
rhauber@honkamp.com
www.honkamp.com