The document summarizes key changes to tax rates and provisions under the Tax Cuts and Jobs Act. It outlines reductions to individual and corporate income tax rates. It also discusses changes to deductions including limits on mortgage interest, state and local taxes, and business interest. Provisions related to cost recovery, pass-through entities, and real estate are also covered.

1. Richard Shapiro, Director
January 24, 2018
Demystifying the Tax
Cuts and Jobs Act

2. New Tax Rates per Tax Reform Legislation
ORDINARY INCOME TAX RATES OF 2017 LAW VS. TAX REFORM LEGISLATION AS ENACTED
2017 Law (Tax Year 2018) Tax Reform Legislation as Enacted (Tax Years 2018-2025)
Single Married Couples Filing Jointly Single Married Couples Filing Jointly
Ordinary
Income
Taxable
income over
But not
more than
Ordinary
Income
Taxable
income over
But not
more than
Ordinary
Income
Taxable
income over
But not
more than
Ordinary
Income
Taxable
income over
But not
more than
10% - $9,525 10% - $19,050 10% - $9,525 10% - $19,050
15% $9,525 $38,700 15% $19,050 $77,400 12% $9,525 $38,700 12% $19,050 $77,400
25% $38,700 $93,700 25% $77,400 $156,150 22% $38,700 $82,500 22% $77,400 $165,000
28% $93,700 $195,450 28% $156,150 $237,950 24% $82,500 $157,500 24% $165,000 $315,000
33% $195,450 $424,950 33% $237,950 $424,950 32% $157,500 $200,000 32% $315,000 $400,000
35% $424,950 $426,700 35% $424,950 $480,050 35% $200,000 $500,000 35% $400,000 $600,000
39.6% $426,700 - 39.6% $480,050 - 37% $500,000 37% $600,000 -
CORPORATE INCOME TAX
2017 Law Enacted Legislation
Highest bracket at 35% 21% flat rate; effective tax years beginning after Dec.
31, 2017. Corporate AMT was repealed
Personal service corporation taxed at 35% No special rate for personal service corporations
Pass-Through Income
2017 Law Enacted Legislation
Highest bracket at 39.6% Highest tax bracket at 29.6%; assuming there are no
limitations to Qualified Business Deduction

3. TAX RATE CHANGES
• The maximum marginal income tax rate applicable to individuals has
been lowered from 39.6% to 37%.
• This rate reduction will expire after 2025 unless there is a
renewal.
• The maximum marginal tax rate applicable to long-term capital gains
earned by individuals remains at 20% (3.8% net investment income
tax also remains potentially applicable).
• Individual AMT exemption and phase-out thresholds are significantly
increased.
• Corporate tax rate is lowered to 21%.
• Corporate AMT repealed.
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4. Cost Recovery
Provisions
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5. Temporary 100% Expensing for Certain Business Assets
• 100% expensing is allowed for assets acquired and placed in service
after September 27, 2017 and before January 1, 2023.
• 100% expensing will be phased out in years beginning in 2023 and
fully phased out by 2027.
• Assets must be newly placed in service by the taxpayer but may have
been previously placed in service by unrelated taxpayer; used assets
now qualify. Assets cannot have been acquired from a related party
for bonus depreciation to be applicable.
• Assets with a MACRS life of 20 years or less is eligible for bonus
depreciation.
• Taxpayers may elect 50% expensing in lieu of the 100% expensing
for qualified property placed in service during the first tax year ending
after September 27, 2017 and can also elect out of bonus
depreciation.
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6. Depreciation Deductions for Nonresidential Real Property and
Residential Rental Property
ADS Depreciation Method 2017 Law Tax Reform
Enacted Law
Type of Asset Useful Life Useful Life
Qualified Improvement Property 39 20
Residential Rental Property 40 30
Nonresidential Rental Property 40 40
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• Qualified Restaurant Property, Qualified Retail Improvements and Qualified
Leasehold Improvements are now Qualified Improvement Property.
• Qualified Improvement Property has 15 years MACRS recovery life. It is unclear
from the current language of the Act that Qualified Improvement Property will be
eligible for bonus depreciation; further clarification is necessary.
• Under the ADS method of depreciation, the useful life of the following types of
asset has been revised.
* ADS lives are important for the new interest deduction limitation (discussed later) and E&P
calculations

7. Section 179 Expensing
• Effective for first year assets placed in service after
December 31, 2017 --
• The annual limitation is raised from $500,000 to $1,000,000.
• The threshold for phasing out the deduction is increased from
$2,000,000 to $2,500,000.
• All limits are adjusted for inflation for years beginning after
2018 taxable calendar year.
• Expanded the definition of certain real property
• Still includes Qualified Improvement Property
• Qualified Real Property now includes roofs, HVAC, fire
protection and alarm systems and security systems.
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8. Section 179 and Bonus Depreciation – Some
Notes
• IRC Sec. 179 is applied at the partner/shareholder level for
partnerships/ S corporations.
• Please note the following regarding any state where there is a real
estate business --
• Some states have decoupled from the bonus depreciation
provisions but follow IRC Sec. 179 (e.g., New York).
• Some states decouple from both IRC Sec. 179 and bonus
depreciation.
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9. Provisions Relating
to Sales of Real
Property
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10. Like-Kind Exchanges of Real Property (IRC Sec. 1031)
• The Act limits the deferral of gain on like-kind exchanges completed
after December 31, 2017, to only real property not held primarily for
resale. Personal property such as vehicles, furniture, boats and art
collectibles no longer allowed a deferral of gain.
Tax Gain on the Sale of Partnership Interest on Look-Through Basis
• The Act treats a portion of the gain or loss from the sale or exchange
of an interest in a partnership by a foreign person as effectively
connected income (“ECI”), if that partnership was engaged in a U.S.
trade or business. There are limitations on the portion of gain or loss
that should be treated as ECI.
• The gain or loss treated as ECI under the provision is reduced by the
amount of gain subject to tax under FIRPTA, IRC Sec. 897.
• Transferees of partnership interest required to withhold 10% of
amount realized unless transferor certifies that transferor is not a
nonresident alien individual or foreign corporation.
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11. Carried Interest
• The Act does not eliminate the tax advantages of carried interest but
instead adjusted the holding period. Carried interest permits managers
of private equity funds and real estate partnerships to be compensated
while not immediately recognizing ordinary income for their services on
receipt of such interest. Instead, income is deferred until the sale of
underlying assets within the entity occurs. Pre-Act law treated income
from the sale of the interest as short-term capital gain if held one year
or less.
• Effective December 31, 2017, the new Act treats carried interest gains
on partnership assets held for three years or less as short-term capital
gain and as long-term capital gain if held more than three years.
• Observation: the sale of IRC Sec. 1231 property is not mentioned by
the new carried interest rules.
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12. Pass-Through and
Partnership Issues
Provisions
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13. Pass-Through Tax Treatment - “QBI” Deduction
• Qualified Business Income (“QBI”)
• 20% deduction for partnerships (including LLCs taxed as partnerships), S
corporations, and sole proprietorships
• Investment income excluded (interest, dividends, capital gains)
• Earned income excluded (salaries, guaranteed payments)
• Deduction phased-out for owners of service businesses
• Deduction applies for tax year beginning after December 31, 2017
• W-2 and W-2 Plus Asset Based Limitations
• The 20% deduction for QBI is limited to the greater of --
• 50% of W-2 wages or compensation paid by the entity during the taxable
year or
• 25% of taxpayer’s W-2 expense aggregated with 2.5% times the unadjusted
basis of the entity’s assets; depreciation does not affect the amount of the
deduction
• The above limitations do not apply for taxpayers who are below the threshold
amount: Taxable income of $315,000 for married taxpayers filing a joint
return and $157,500 for all other taxpayers. The application of the wage limit
phases out over the next $50,000 ($100,000 for joint filers)
• There are additional limitations for specified service businesses
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14. Limitation of Losses for Taxpayers Other Than Corporations
• The new law amends and adds to IRC Sec. 461 an additional
limitation on a taxpayer’s business loss from entities other than
C corporations called an excess business loss limitation.
• The excess business loss is defined as the excess of
aggregate deductions of the taxpayer attributable to his or her
trade or business over the sum of aggregate gross income or
gain for the taxable year plus a threshold amount of $500,000
for married taxpayers filing jointly or $250,000 for all other
taxpayers.
• Any residual losses can be treated as a net operating loss
carryforward in the following years without any restrictions.
• The threshold amounts will be adjusted for inflation every year
and this limitation will expire after December 31, 2025.
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15. Provisions Relating
to Deductions
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16. Limitation on Business Interest Expense Deduction
• Business interest expense is interest paid or accrued on
indebtedness related to a trade or business but does not include
interest expense related to investments.
• The new law replaces IRC Sec. 163(j) and limits business interest
deductions for all taxpayer’s at 30% of the adjusted taxable income.
The interest deduction limitation is applied at the entity level.
• The legislation allows real estate trades and businesses to elect out
of the business interest expense limitation but requires real property
to be depreciated using the alternative depreciation system method.
• For taxable years beginning before January 1, 2022, adjusted taxable
income reflects “EBIDTA;” for tax years beginning after December 31,
2021, it reflects “EBIT” (and therefore more interest expense
disallowed).
• As of now there is no guidance on how to elect out of this limitation
but there is a common consensus that taxpayer will have to file Form
3115, Application for Change in Accounting Method.
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17. Net Operating Loss “NOL” Deduction
• Modification of net operating loss provisions
• Effective for tax years beginning after December 31, 2017, the two
year carryback provision for NOLs is repealed and NOLs can be
carried forward indefinitely.
• The new law will limit the amount of NOL carryforward to any year
to 80% of the taxpayer’s taxable income.
• The new law does not affect capital loss provisions.
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18. Itemized Deductions
• Modifications to Mortgage Interest Deduction
• The new law reduces the indebtedness on the mortgage interest
deduction limitation from $1,000,000 to $750,000 for debt incurred after
December 15, 2017 and the interest would only be deductible on a
taxpayer’s principal or second residence.
• The $1,000,000 limitation is grandfathered for older debts.
• The new law suspends the mortgage interest deduction for interest on
home equity indebtedness.
• For tax years beginning after December 31, 2025, the limitation will
revert back to $1,000,000 regardless of when the debt was incurred.
• Modifications to State and Local Tax Deduction
• The Act caps the deduction for property taxes and state income (or
property taxes and sales taxes) to $10,000 per year, effective for tax
years beginning after December 31, 2017 and before January 1, 2026.
• Limitation does not apply to taxes incurred in connection with a trade or
business or the production of income (IRC Sec. 212).
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19. Other Provisions
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20. Rehabilitation Credit
• Previously there was a two-tier tax credit for rehabilitation expenditures. A
20% credit for qualified rehabilitation expenditures to a certified historic
structure and a 10% credit for qualified rehabilitation expenditures to a
qualified rehabilitated building (not historic, but pre-1936, referred to as the
“the old building credit”).
• A certified historic structure is any building listed in the National Register as
landmarked or is located in a registered historic district.
• A qualified rehabilitated building generally means a building that was first
placed in service before 1936 and has Department of the Interior approval for
the rehabilitation.
• The Act repeals the 10% credit for old buildings but retains the 20% credit for
historic structures.
• There is an additional provision that the credit be taken ratably over a five
year period at 20% of the credit per year. The effective date is for amounts
paid or incurred after December 31, 2017; a transition rule applies.
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21. Unrelated Business Taxable income
• Effective December 31, 2017, organizations that carry on more
than one unrelated trade or business needs to separately
calculate unrelated business taxable income for each trade or
business. This will prohibit the use of deductions related to one
trade or business to offset income from another separate trade
or business.
• The new law is unclear on how the aggregation rules will be
implemented for exempt organization investing in real estate.
Are all the investments in real estate aggregated or will the
organization be required to separate each investment when
calculating the tax?
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22. Qualified Opportunity Funds (“QOF”)
• Prior tax law has in the past provided incentives to encourage
economic growth and investment in distressed communities by
providing tax benefits to business located within certain designated
boundaries.
• The Act provides for the temporary deferral of inclusion in gross
income for capital gains reinvested in a QOF and the permanent
exclusion of capital gains from the sale or exchange of an investment
in the QOF held at least 10 years.
• A QOF is an investment vehicle organized as a corporation or a
partnership for the purpose of investing in Qualified Opportunity Zone
(“QOZ”) property (other than another QOF) that holds at least 90% of
its assets in QOZ property.
• QOZ property includes: any QOZ stock, any QOZ partnership interest,
and any QOZ business property.
• There are additional limitations on the provision and it is in effect from
the date of the Act but sunsets on December 31, 2026.
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23. Provisions Relating
to Construction of
Real Property
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24. Accounting for Inventories
• Modifications to accounting for inventories
• Effective for tax years beginning after December 31, 2017, the
average gross receipts threshold amount for qualified small business
taxpayers has been increased from $10 million to $25 million,
adjusted for inflation. Qualified small business taxpayers are exempt
form the accrual method of accounting for purchases and sales of
inventories.
• Taxpayers adopting the new provision will be required to report
Form 3115, Application for Change in Accounting Method, per IRC
Sec. 481.
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25. Accounting for Long-Term Contracts
• Modifications to the accounting for long-term contracts
• Effective for contracts entered into after December 31, 2017, the average
gross receipts threshold amount, for the taxpayers that are exempt from
the percentage-of-completion accounting method for long-term
construction contracts, has been increased from $10 million to $25
million for the prior three taxable years, adjusted for inflation.
• Taxpayers that meet this exception would be permitted to use the
completed-contract method or any other permissible exempt contract
method. Application of this provision applies on a cutoff basis and does
not result in an adjustment under IRC Sec. 481.
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26. Changes to Uniform Capitalization (UNICAP) Rules
• UNICAP rules require taxpayers to capitalize direct costs and certain
indirect and service costs, which are normally expensed, as part of
inventory for tax purposes. The UNICAP rules generally apply to real
or tangible property produced by the taxpayer and real or intangible
property acquired by the taxpayer for resale.
• Modifications to the UNICAP rules
• Effective for tax years beginning after December 31, 2017, the average
annual gross receipts threshold amount, for qualified small business
taxpayers, increased from $10 million to $25 million, adjusted for
inflation.
• Qualified small businesses are not subject to the UNICAP rules.
• Taxpayers adopting the new provision will be required to report Form
3115, Application for Change in Accounting Method and require an
adjustment per IRC Sec. 481.
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27. Questions
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28. This publication is intended to provide general information to our clients and
friends. It does not constitute accounting, tax, or legal advice; nor is it intended to
convey a thorough treatment of the subject matter.
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