Momentum - Business to Business Online Magazine MOMENTUM September 2018 | Page 32

Overview of the Business Tax Changes in the Tax Cuts & Jobs Act TCJA By: T. Mark Rush, CPA | Partner Ham, Langston & Brezina, LLP [email protected] Part 2 of a Series on the new Tax Cuts and Jobs Act Here’s a look at some of the more important elements of the new tax law that have an impact on partnerships, S corporations, and pass-through income. In general, they are effective starting in 2018. * New deduction for pass-through income. The new law provides a 20% deduction for “qualified business income,” defined as income from a trade or business conducted within the U.S. by a partnership, S corporation, or sole proprietorship. For taxpayers with taxable income above $157,500 ($315,000 for joint filers), (1) a limitation based on W-2 wages paid by the business and the basis of acquired depreciable tangible property used in the business is phased in, and (2) the deduction is phased out for income from certain service related trades or businesses, such as health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners. * S corporation conversion to C corporation. Under the new law any Code Section 481(a) adjustment of an “eligible terminated S corporation” attributable to the revocation of Its S corporation election (i.e., a change from the cash method to the accrual method) is reported ratably during the 6-tax-year period starting with the year of change. An “eligible terminated S corporation” is any (C) corporation which meets the following tests: (1) it was S corporation the day before the enactment of the new law, (2) during the 2-year period beginning on the date of enactment it revokes its S corporation election, and (3) all of the owners on the date the election is revoked are the same owners as the owners on the date of enactment. Money distributed by the eligible corporation after the post-termination transition period will be allocated between the accumulated adjustment account and the retained earnings. * Partnership “technical termination” repealed. Previously, partnerships experienced a “technical termination” if, within any 12- month period, there was a sale or exchange of at least 50% of the total interest in partnership. This resulted in a deemed contribution of all partnerships assets and liabilities to a new partnership and exchange for an interest in it, followed by a deemed distribution of interests in the new partnership to the purchasing partners and continuing partners from the terminated partnership. * Partnership loss limitations. A partner can only deduct his share of partnership loss to the extent of this basis in his partnership interest as of the end of the tax year in which the loss occurred. IRS has ruled that this loss limitation rule should not apply to limit a partner’s deduction for his share of partnership charitable contributions. The new law states that the rule limiting a partner’s losses to his basis in his partnership interest is applied by reducing basis by their share of partnership charitable contributions and foreign taxes paid. * Look-through rule on sale of partnership interest. Gain or loss on the sale of a partnership interest is now effectively connected with a U.S. business to the extent the selling partner would have had effectively connected gain or loss had the partnership sold all its assets on the date of sale. MOMENTUM / September 2018 31