The document provides an overview of changes to taxation of C corporations and pass-through entities under the Tax Cuts and Jobs Act of 2017. Key points include: - The corporate tax rate was permanently reduced from 35% to a flat 21% rate. - A new 20% deduction was introduced for qualified business income from pass-through entities, though it is subject to complex limitations. - Expensing and bonus depreciation rules were expanded to incentivize business investment. - Individual tax rates were reduced and the standard deduction was nearly doubled, though many itemized deductions were limited or eliminated.

1. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part
of the international BDO network of independent member firms.
TAX REFORM UPDATE
July 2018

2. TITLE2
C Corporations
Tax Rates
• The 35% tax rate for C corporations would be permanently reduced by 14% percent to a flat rate of 21%.
• Although other taxes could impact the ultimate effective tax rate (e.g., net investment income tax), the
rate drop from 35 to 21% is certain to cause entities to review their current structure.
• Other factors that could impact the effective corporate rate include:
• Interest deductions up to 30% of adjusted taxable income,
• Section 168(k) 100% expensing/bonus depreciation for certain capital investments for five years
followed by a four year phase-out, and
• indefinite net operating loss carryforwards (limited to 80% of taxable income per year)
• C corporations will no longer need to consider the corporate alternative minimum tax, which is repealed.

3. TITLE3
Taxation of Pass-Through Entities
• Section 199A provides a deduction of up to 20% of “qualified business income” generated through a
pass-through entity (partnership, S-corporation, sole proprietorship)
• The Section 199A deduction can create an effective maximum rate of 29.6% (highest statutory
individual rate is 37%)
• Significant limitations may result in an inability to achieve the reduced 29.6% tax rate
• Calculation of the Section 199A deduction requires careful analysis and application of entirely new
terms and concepts
• Qualified Trade or Business; Specified Services Business; Qualified Business Income;
Qualified Investment Property; Complicated Deduction Limitation Calculations

4. TITLE4
Taxation of Pass-Through Entities
• 20 Percent Deduction - Very complex formula*
• First Step - Determine the taxpayer’s deduction for qualified business income:
• The lesser of:
• (A) the taxpayer’s “combined qualified business income” or
• “Combined Qualified Business Income” – defined as the sum of 20% of the
taxpayer’s qualified trade or business income (subject to the limitation discussed
on the next slide), 20% of qualified real estate investment trust (REIT) dividends,
and 20% of qualified publicly traded partnership income.
• (B) 20 percent of the excess of taxpayer’s taxable income less taxpayers preferred
income (capital gain and qualified dividends)
* As illustrated here, formula assumes taxpayer does not have any qualified cooperative dividends for
the year.

5. TITLE5
Taxation of Pass-Through Entities
• Second Step – Determine the deductible amount.
• Limitation - The deductible amount for each qualified trade or business is limited to the lesser of:
• (A) 20 percent of the taxpayer’s qualified business income with respect to the trade or
business, or
• (B) the greater of:
• (i) 50 percent of the W-2 wages with respect to the qualified trade or business or
• (ii) 25 percent of the W-2 wages with respect to the qualified trade or business, plus 2.5
percent of the unadjusted basis immediately after acquisition of all qualified property.
• Qualified property is tangible property subject to depreciation, which is used in the
qualified trade or business, and which the depreciation period has not expired as of
the close of the taxable year.
• The 20-percent deduction is not allowed in computing AGI, rather as a deduction in reducing
taxable income.
• This deduction is available to both those who claim itemized deductions, and those who claim
the standard deduction.

6. TITLE6
Taxation of Pass-Through Entities
• Qualified Trade or Business - Means any trade or business other than
• (A) a specified service trade or business OR
• Adopts the section 1202(e)(3)(A) definition (without regard to engineering and
architecture).
• Therefore, any trade or business involving the performance of services in the fields of
health, law, 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.
• Small Specified Trade or Business – Are permitted the deduction, but begin to phase out of
the deduction for joint taxpayers with taxable income exceeding $315,000 and other
taxpayers with taxable income exceeding $157,500.
• Joint taxpayers completely phase out of the deduction with $415,000 of taxable
income, other taxpayers completely phase out at $207,500 of taxable income.
• (B) the trade or business of performing services as an employee
• Estates and Trusts – Eligible for the 20-percent deduction.

7. TITLE7
Various Other Accounting Method and Deduction Changes
• Depreciation
• Section 179 expensing increased from $500,000 to $1 million
(Phased out dollar for dollar to the extent Section 179 property exceeds $2.5 million. Up from 2 million)
• “Bonus Depreciation” is increased from 50% to 100% for qualified property (assets) acquired and placed
in service after September 27, 2017 and before 2023
(Phase down of to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026)
• The real bonus: Qualified property definition is changed to include used property acquired by purchase
as long as the acquiring taxpayer had not previously used the property and it is not acquired from a
related party
• Meals and Entertainment
• Deduction for entertainment, amusement, or recreation expenses, membership dues for clubs, and
facilities used in connection with those items are eliminated
• Expands the 50% meal limitation and eliminates the “on premises”, Section 119, and de minimis meal
deduction after 2025

8. TITLE8
Various Other Accounting Method and Deduction Changes
• Increases the threshold for Cash method of accounting
• Corporations and partnerships with corporations as partners may use the cash methods of
accounting if the average annual gross receipts for the past three years are $25 million or less.
Up from $5 million
• Businesses with inventory may use the cash method of accounting if the average annual gross
receipts are $25 million or less. Up from $1 million and $10 million in certain industries
• Business Interest Expense Limitation
• Net business interest expense of any taxpayer is limited to 30% of adjusted taxable income plus
floor plan financing interest
• Adjusted taxable income does not include:
• Business interest income or expense
• Income, loss, or deductions not related to trade or business
• Net operating loss deductions
• Section 199A 20% deduction for pass-through income
• Depreciation, amortization, or depletion for year beginning before January 1, 2022

9. TITLE9
Note: Individual Tax Reform is temporary. The provisions are generally effective January 1,
2018, and expire on December 31, 2025
Provision Prior Law New Law
Individual Tax Rates Seven tax brackets: 10%,
15%, 25%, 28%, 33%, 35%,
and 39.6%.
The top individual rate was
39.6% for joint filers with
taxable income over
$470,700 and single filers
with taxable income over
$418,400.
Seven tax brackets: 10%, 12%,
22%, 24%, 32%, 35%, and 37%.
The top individual rate will be
37% for joint filers with more
than $600,000 of taxable
income and single filers with
more than $500,000 of
taxable income.
Individual Tax Law Changes

10. TITLE10
Provision Prior Law New Law
Standard Deduction The standard deduction
was $12,700 for joint
filers, $9,350 for head-of-
household filers, and
$6,350 for single filers.
The standard deduction is
increased to $24,000 for joint
filers, $18,000 for head-of-
household filers, and $12,000 for
all other taxpayers, adjusted for
inflation in tax years beginning
after 2018.
Personal Exemptions The personal exemption
amount was $4,050.
For tax years beginning after Dec.
31, 2017 and before Jan. 1, 2026,
the exemption amount is reduced
to zero.
Individual Tax Law Changes

11. TITLE11
Provision Prior Law New Law
State and
Local Tax
Deduction
State and local income
taxes were generally
deductible as an
itemized deduction.
For tax years beginning after Dec. 31, 2017 and before
Jan. 1, 2026, itemized deductions for state or local
taxes are limited. The aggregate deduction for state
and local real property taxes, personal property taxes,
state and local and foreign income and excess profits
taxes, and general sales taxes is limited to $10,000
($5,000 for married individuals filing separately). This
$10,000 limitation will also apply to state and local
income taxes imposed on owners of pass-through
entities on their business income.
The deduction for foreign real property taxes is
completely eliminated (unless paid or accrued in
carrying on a trade or business or in an activity
engaged in for profit).
Individual Tax Law Changes

12. TITLE12
Provision Prior Law New Law
Home
Mortgage /
Home Equity
Interest
Deduction
Taxpayers could deduct
interest on the loan balance
of up to $1 million of home
acquisition debt secured by a
qualified primary or
secondary residence (reduced
to $500,000 for taxpayers
married filing separately).
Interest on the excess balance
of home acquisition debt was
deductible as mortgage
interest paid on home equity
debt, up to $100,000.
For tax years beginning after Dec. 31, 2017 and
before Jan. 1, 2026, the deduction for interest
on home equity debt is suspended, and the
deduction for home acquisition mortgage
interest is limited to underlying debt of up to
$750,000 ($375,000 for married taxpayers filing
separately).
The new lower limit doesn’t apply to any
acquisition debt incurred before Dec. 15, 2017.
Prior law’s $1 million/$500,000 limitations
continue to apply to taxpayers who refinance
existing qualified residence debt that was
incurred before Dec. 15, 2017, so long as the
debt resulting from the refinancing doesn’t
exceed the amount of the refinanced debt.
Individual Tax Law Changes

13. TITLE13
Provision Prior Law New Law
Charitable
Contributions
For cash contributions to certain
charitable organizations, an individual
who itemized could deduct charitable
contributions up to 50%, 30% or 20% of
AGI, depending on the type of property
contributed.
For cash contributions to public
charities and certain private
foundations, contribution deductions
were limited to 50% of AGI.
Contributions exceeding the limit could
be carried forward and deducted for up
to five years.
For contributions made in tax years
beginning after Dec.
31, 2017 and before Jan. 1, 2026, the
AGI limitation for cash contributions
to public charities and certain
private foundations is increased from
50% to 60% of AGI.
Contributions exceeding the 60%
limit may be carried forward and
deducted for up to five years.
Individual Tax Law Changes

14. TITLE14
Provision Prior Law New Law
Alternative
Minimum Tax
(AMT)
The AMT exemption amount for 2017
was:
• $54,300 for single taxpayers,
• $84,500 for married taxpayers filing
jointly,
• $42,250 for married filing
separately.
These exemption amounts were
reduced (not below zero) to an amount
equal to 25% of the amount by which
the taxpayer’s alternative minimum
taxable income (AMTI) exceeded the
following phase-out thresholds:
• For joint returns, $160,900.
• For single filers, $120,700.
• For married filing separately,
$80,450.
For tax years beginning after Dec. 31, 2017
and before Jan. 1, 2026, the AMT exemption
amounts are increased:
• $70,300 for single taxpayers,
• $109,400 for married filing jointly,
• $54,700 for married filing separately.
These exemption amounts are reduced (not
below zero) to an amount equal to 25% of
the amount by which the taxpayer’s AMTI
exceeds increased phase-out thresholds:
• For joint returns, $1 million.
• For all other taxpayers (other than
estates and trusts), $500,000.
Individual Tax Law Changes

15. TITLE15
Provision Prior Law New Law
Excess
Business Loss
Limitation
N/A For tax years beginning after Dec. 31, 2017 and before Jan. 1,
2026, “excess business loss” of a taxpayer other than a C
corporation is disallowed. Under this rule, excess business losses
are not allowed for the tax year but are instead carried forward
and treated as part of the taxpayer’s NOL carryforward in
subsequent tax years. This limitation applies after the Section 469
passive loss limitation rules are applied.
An excess business loss for the tax year is the excess of aggregate
deductions of the taxpayer attributable to trades and businesses
over the sum of aggregate gross income or gain of the taxpayer plus
a threshold amount. The threshold amount for a tax year is
$500,000 for married individuals filing jointly and $250,000 for
other individuals, with both amounts indexed for inflation. For a
partnership or S corporation, the new rule applies at the partner or
shareholder level.
Individual Tax Law Changes

16. TITLE16
Individual Tax Law Changes
Provision Prior Law New Law
Estate & Gift Tax
Exemption
The estate and gift tax
exemption amount was $5
million (inflation adjusted to
$5,490,000 for 2017).
For estates of decedents dying and gifts made
after Dec. 31, 2017 and before Jan. 1, 2026,
the base estate and gift tax exemption amount
is doubled from $5 million to $10 million.
The $10 million amount is indexed for inflation
and is expected to be approximately $11.2
million in 2018 ($22.4 million per married
couple).
The increase in exemption amount also applies
to generation-skipping transfer taxes.