Spring 2018 issue of Horizons

Spring 2018 A publication by RubinBrown LLP

What Every Financial Executive Needs to Know About the New Tax Law FEATURING u The New Federal Tax Law has a Big Impact...Even on Each State

u Tax Reform: Diving into International Waters

u The effect on various key industries

Featuring

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RubinBrown News

Chairman & Managing Partner John F. Herber, Jr., CPA, CGMA

The New Federal Tax Law has a Big Impact...Even on Each State

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Chicago Managing Partner Christopher J. Langley, CPA

Tax Reform: Diving into International Waters

Denver Managing Partner Michael T. Lewis, CFA, CGMA

Industry Updates

Denver Resident Manager Gregory P. Osborn, CPA, CGMA

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MANUFACTURING & DISTRIBUTION

CONSTRUCTION

PRIVATE EQUITY

New Tax Law has Direct, Positive Impact on the Construction Industry The new tax law has positive impacts on the construction industry and its owners.

New Tax Law Won’t be a Deal Killer for Private Equity The Act shifts the way deals are done and creates uncertainty with selecting an entity type.

Manufacturers and Distributors Feel Effect of Sweeping Tax Reform

Kansas City Managing Partner Todd R. Pleimann, CPA, CGMA

Key changes from the Act and how businesses can prepare for the adjustments.

Las Vegas Managing Partner Glenn L. Goodnough, CPA, CFE

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PUBLIC SECTOR

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HEALTHCARE

NOT-FOR-PROFIT

Municipalities Feel the Pinch When Complying with the New Tax Law State and local government entities can expect impacts on their ability to finance operations.

Tax Cuts and Jobs Act: A Healthcare Perspective Immense changes expected for the healthcare industry with the new tax law.

Tax Law Impact to the Not-For-Profit and Colleges and Universities Sectors Nonprofits may consider new tactics for donations as fear builds from the new tax law.

St. Louis Managing Partner Frederick R. Kostecki, CPA, CGMA

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Editor – Dawn M. Martin Art Director – Jen Chapman Designer – Brendan Coleman

LAW FIRMS

New Tax Law Highlights: The Impact on Law Firms and Their Partners Highlights from the Tax Cuts and Jobs Act of 2017 and how law firm partners are affected.

Horizons , a publication by RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions. Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

www.RubinBrown.com

Readers should not act upon information presented without individual professional consultation.

New Tax Law Stirs Questions… and Opportunities Every household…and every business is impacted by the Tax Cuts and Jobs Act that was signed into law at the end of 2017. Our country hasn’t experienced tax code changes this significant in more than 30 years. Throughout this issue of Horizons , you will read about the many ways you and your businesses are impacted by the new tax law. Our talented tax professionals have written many articles – some specific to your industries – that break down the changes and help you identify opportunities. In early February, RubinBrown held a webinar titled “What Every Financial Executive Needs to Know About The New Tax Law.” We were pleasantly surprised that more than 700 of our clients and friends registered for this two-hour webinar. On our website ( www.RubinBrown.com/HR1 ), you will find a resource center that includes a number of tools and information to help you navigate the provisions of the new tax law. We have posted a rebroadcast of the webinar if you weren’t able to join us in February. You’ll also find a printable overview of the law, which includes straightforward explanations of the more complex matters.

Steven J. Brown, CPA Chairman, Tax Services Group

Note, because this entire issue of Horizons is dedicated to the new tax law, Steven J. Brown, Chairman of the Tax Services Group has been asked to author the Chairman’s Corner.

We have received many questions on the new tax law, but the one area that is most asked about is the deductibility of meals, entertainment and transportation expenses. In fact, when we sent out our E-Focus Newsletter on the topic, our website was so overloaded with hits, that it nearly brought it down. I would encourage you to read our full article on our website by visiting www.rubinbrown.com/Entertainment-Tax. Please continue to reach out to us with your questions. We are working hard to make sure we’re serving you at the highest levels in this changing and evolving business environment.

Pleasant reading,

Every household...and every business is impacted by the Tax Cuts and Jobs Act that was signed into law at the end of 2017 .

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RUBINBROWN NEWS

RubinBrown Expands to Chicago to Grow National Real Estate Practice

RubinBrown joined together with Chicago-based FLS Group, LLC effective December 1, 2017. This combination will allow RubinBrown to grow its national real estate practice with a larger presence in the Midwest market. The new office is located in the Chicago metro area and integrates its five partners and 40 team members from FLS Group into RubinBrown.

RubinBrown’s Real Estate Services Group is currently led by Bryan Keller , Partner-In-Charge. Over the past 30 years, the group has developed a strong reputation nationally as a leader in accounting and advisory services, providing a full range of assurance, tax, business planning and consulting services to investment funds, real estate partnerships, developers, management companies, governmental agencies, syndicators and investors, financial institutions and construction-related companies. RubinBrown has developed an expertise in affordable housing, historic tax credit services, new markets tax credit services and renewable energy.

Bryan Keller, CPA, CGMA Partner-In-Charge, Real Estate Services Group

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Real estate services comprise approximately 80% of FLS Group’s annual revenue. Adding to the firm’s industry expertise is Bruce Schiff . Bruce brings more than 30 years of experience in the field of affordable housing finance. He is considered a widely respected expert in the industry, particularly with the section 42 Low-Income Housing Tax Credit (LIHTC) program.

Chris Langley , a partner in RubinBrown’s Real Estate Services Group, relocated to Chicago and now serves as Managing Partner of the new Chicago office. With more than 25 years of accounting and finance experience, including 15 years with RubinBrown’s Real Estate Service Group, Langley works with real estate clients on a national basis.

RubinBrown Chicago Office 4709 W. Golf Road, Suite 200 Skokie, Illinois 60076 773.777.4445

Chris Langley, CPA Chicago Managing Partner

Jarvis Friduss, CPA Tax Services Group

Bruce Schiff, CPA Assurance Services Group

CHICAGO PARTNERS

Henry Lukee, CPA Tax Services Group

John Woodbury, CPA Tax Services Group

Terry Michaels, CPA Tax Services Group

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RubinBrown Combines with Goltermann & Associates in St. Louis to Grow Entrepreneurial Services and Wealth Advisory Practices RubinBrown joined together with St. Louis-based Goltermann & Associates, P.C. effective January 1, 2018. This combination will allow RubinBrown to grow its specialization in both entrepreneurial and wealth advisory services, integrating partners Greg Goltermann and Joe Goltermann and their team into RubinBrown’s Clayton office. Goltermann & Associates has provided accounting, tax and advisory services to families and entrepreneurial businesses in the St. Louis area for more than 30 years.

“Similar to RubinBrown, Goltermann & Associates has a long-standing, reputable history in the St. Louis community and values strong client relationships,” said RubinBrown Chairman John Herber. “With the combination of our firms, clients will continue to receive superior service and individual attention to their specific needs, while also benefiting from RubinBrown’s more robust resources and integrated financial planning process.”

Greg Goltermann, CPA

Joe Goltermann, CPA, CFP

RubinBrown Manager, Hannah Castellano, CPA, Receives Women to Watch Award

Hannah Castellano , a manager in RubinBrown’s Wealth Advisory Services Group, was honored with the 2017 Missouri Society of Certified Public Accountants (MOCPA) Women to Watch – Emerging Leader Award for her professional achievements and leadership efforts. Since 2006, MOCPA and the American Institute of Certified Professional Accountants have partnered to honor outstanding women in the profession through the Women to Watch Awards, highlighting their accomplishments and demonstrating to emerging female leaders that success is not out of reach.

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RubinBrown CPA, Kendrick Coleman, Honored with Leadership Award

Kendrick Coleman , a staff accountant in the Entrepreneurial Services Group at RubinBrown, was recently honored with the Southern Illinois University (SIU) Emerging Saluki Leader Award (ESLA) at the annual College of Business Homecoming Reception. The ESLA recognizes alumni of the SIU College of Business who have graduated within the previous 15 years and are deserving of recognition for their outstanding achievements in business, academia, government, nonprofit organizations or service to their community. Honorees were chosen by the college’s external advisory boards based on outstanding achievements at the early stages in their careers.

RubinBrown Manager, Molly Osadjan- Rudolf Named Top 25 Young Professional

Molly Osadjan-Rudolf , strategic client development manager at RubinBrown, was recently named one of ColoradoBiz magazine’s Top 25 Most Influential Young Professionals for her professional achievement, community involvement and personal story. Osadjan-Rudolf was recognized at the ninth annual GenXYZ Awards held at Mile High Station on January 18. The award ceremony honored Colorado business standouts in the 20-40 year age group. Winners were selected from online nominations and judged by a panel composed of community business leaders, ColoradoBiz magazine’s editorial staff and past GenXYZ winners.

CONNECT WITH US ON SOCIAL MEDIA We regularly post accounting and tax updates, as well as announce client seminars and other important and timely information.

Connect with RubinBrown Recruiting

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Need to Learn More About Revenue Recognition?

Visit RubinBrown’s Revenue Recognition Resource Center for a series of articles on the new accounting guidance for revenue recognition in which the different aspects of the new standard are explored.

The resource center can be accessed by visiting www.RubinBrown.com/RevRec .

Andrea Turner, CPA Tax Services Group Kansas City

Beth Womersley, CPA, CRMA Business Advisory Services Group Denver

NEW TALENT PARTNERS

RUBINBROWN WEALTH ADVISORS

The RubinBrown Wealth Advisors website features a convenient location to access service offerings, market and investment news updates, client resources and more. www. RubinBrownWealthAdvisors .com

RubinBrown News

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Meredith Duke Assurance Services Group Chicago

Chris O’Neal, CPA Tax Services Group St. Louis

NEW TALENT MANAGERS

Catherine Eusebio Assurance Services Group Chicago

Fransiscus Ong, CPA Tax Services Group Chicago

Brenda Hebenstreit, CPA Assurance Services Group St. Louis

Nabila Riaz, CPA Tax Services Group Chicago

Diana Hoernicke, CPA Tax Services Group Las Vegas

Janet Rodriguez Assurance Services Group Chicago

Benilda Jacobsohn, CPA Tax Services Group Chicago

Avni Shah Assurance Services Group Chicago

Jay Levey, CPA Assurance Services Group Chicago

Ariana Warren Tax Services Group St. Louis

Michael Mixon Assurance Services Group Chicago

Jackie Zhang, CPA Assurance Services Group Las Vegas

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The New Federal Tax Law has a Big Impact ...Even on Each State by Rhonda Sparlin, CPA, Jeff Schuetz, CMI and Matt Cathcart

The Tax Cuts and Jobs Act (H.R. 1), signed into law by President Trump in late December 2017, presents widespread changes to the federal tax code that also presents similar and substantial impact on state taxation.

While most taxpayers will enjoy a tax cut at the federal level, those same taxpayers may experience an increase in taxes at the state level. The degree to which federal tax reform will affect a taxpayer’s state taxes is largely governed by where the taxpayer resides or operates and how those states conform to the Internal Revenue Code’s (IRC) definitions and other provisions. The vast majority of state individual income and corporate taxes conform to the IRC in one way or another. States like Colorado, Illinois, Kansas and Missouri are rolling conformity states. These states have legislation in place which automatically adopts all federal amendments to the IRC as they are passed. Other states, like California, are static conformity states. These states have adopted the IRC as of a specific date and will require additional legislation to conform with federal amendments. Business Income Taxation Federal tax reform presents a variety of considerations for businesses regarding accounting methods, property accounting and entertainment expenses. To the extent these provisions broaden the tax base, we do not anticipate many states to introduce legislation that decouples from these provisions. Capital Expensing H.R. 1 increases the 50% accelerated bonus depreciation under IRC section 168(k) to 100% immediate expensing of qualified capital assets, including machinery and equipment. Approximately 15 states, including Colorado, Kansas and Missouri, conformed to the prior bonus depreciation provisions. That conformity to the new federal law will continue without state legislation to the contrary. Most states have chosen not to conform to the bonus depreciation provisions because of the negative revenue impacts. RubinBrown anticipates a number of states will introduce legislation to address these accelerated depreciation provisions. To the extent these states legislate different depreciation methods, taxpayers will be required to depreciate and track the basis of assets separately for these depreciation methods.

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Corporate taxpayers may want to be more diligent in identifying and securing state income tax credits that provide dollar-for- dollar offsets to the state income tax that results, despite the NOLs.

H.R. 1 shifts the United States from a “worldwide” system of taxation closer to a “territorial” system of taxation

International Taxation H.R. 1 shifts the United States from a

“worldwide” system of taxation closer to a “territorial” system of taxation, in alignment with tax regimes in most other developed countries. Under the new territorial system, deferred earnings are deemed repatriated at the end of calendar year 2017, making them immediately taxable at the federal government rates for Subpart F income. The state tax implications of these repatriated earnings will vary greatly among the states. For instance, the foreign source income exclusion for corporations reporting tax to Colorado is only allowable when the taxpayer claims a foreign tax credit on the federal return. This exclusion is further limited by an extracurricular calculation and could result in surprises for many taxpayers. However, the state allows all corporate taxpayers to reduce federal taxable income for the federal section 78 gross up. Other states like California, Montana and North Dakota have either required or allowed taxpayers to file state returns on a worldwide basis. Taxpayers in these states will need to consider adjustments to deemed repatriated income reported for federal purposes to avoid duplicate taxation. Individual Income Taxation Many of the states that have an individual income tax, including California, Illinois, Kansas and Missouri, have adopted the IRC’s definition of adjusted gross income (AGI) as the starting point for calculating state income tax. In AGI states, adjusted federal gross income carries to the state tax return before any standard or itemized deductions. Six states, including Colorado, start their calculation of state income tax with “federal taxable income.”

Interest Deductibility H.R. 1 now limits the deduction of business interest to 30% of modified income, with exceptions for taxpayers with average annual gross receipts less than $25 million over the prior three years, and certain real property and farming businesses. These changes will increase state income taxes for affected taxpayers. Corporate Taxation Of the states with a corporate income tax, California, Tennessee and at least 20 other states have adopted federal taxable income before net operating losses (NOLs) and special deductions as the starting point to calculate income tax. Colorado, Illinois, Kansas and Missouri plus 14 other states begin their calculations with federal taxable income after NOLs and special deductions. Treatment of Net Operating Losses Prior federal law allowed a NOL to be carried back two years and forward for twenty years. Federal tax reform eliminates NOL carrybacks, while providing for indefinite carryforwards. New federal law also limits the application of NOLs generated after December 31, 2017, to 80% of federal taxable income. While few states fully conform to the federal NOL provisions, some states adopt the IRC section addressing NOLs. Thus, the opportunity to use a state NOL to offset all state taxable income may be similarly limited, resulting in state income tax on 20% of state taxable income.

The New Federal Tax Law has a Big Impact...Even on Each State

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In federal taxable income states, taxpayers transfer an amount equal to AGI less any applicable deductions (i.e. the standard deduction or itemized deductions) to the state tax return. The remaining taxing jurisdictions, such as Arkansas, use a state-specific gross income calculation to determine state income tax. Taxpayers residing in these states may see fewer impacts of federal tax reform when planning and filing state income taxes. Deduction for Pass-Through Entities H.R. 1 allows a single individual taxpayer with income below $157,500 or a couple filing jointly with income below $315,000 to deduct 20% of domestic qualified business income earned from certain partnerships, S Corporations, or sole proprietorships. For taxpayers with income in excess of the income limitations, the deduction is limited to the greater of 50% of wage income or 25% of wage income plus 2.5% of the cost of tangible depreciation property. Certain service businesses operated via pass-through entities are excluded from this deduction. This provision is structured as a deduction after the determination of federal AGI, meaning that taxpayers in the six federal taxable income states will automatically receive the benefit of the deduction at the state level, absent state legislation requiring a modification. In order for this deduction to apply in other states, proactive state legislation is required. Standard Deduction and Personal Exemption The new federal tax bill repeals the $4,050 per-person personal exemption and increases the standard deduction to $12,000 for a single filer or $24,000 for a couple filing jointly. Absent state modifications requiring addbacks of these deductions or new state legislation addressing these deductions, taxpayers in states starting with federal taxable income may have a lower tax liability than taxpayers in AGI states. However, current state laws in California, Kansas and others conform only to the now repealed personal exemption and incorporate a state-defined standard deduction.

As a result, taxpayers in these states will likely experience an increase in tax liability. Meanwhile, Missouri conforms only to the federal standard deduction. Legislation introduced in Missouri would decouple the state from the increased federal standard deduction. This legislation is not yet final but has been amended since introduction to continue the federal/state conformity. Itemized Deductions Taxpayers and many states are concerned that H.R. 1 limits the individual deduction for state and local income, property and sales taxes to $10,000 in the aggregate (or $5,000 in the case of a married individual filing a separate return). This creates complexities when calculating state income taxes for taxpayers in states like California or Colorado that allow the property tax deduction but require taxpayers to add back part or all of the state income tax deduction from the federal return. These states will be required to provide administrative or regulatory guidance to taxpayers regarding whether a state income tax addback is appropriate and how to calculate it given the new federal limitations. The federal limitation on state and local income, property and sales taxes is especially troublesome for taxpayers in states with high income tax rates, significant property taxes or a combination of the two. Media outlets have reported some states may sue the federal government regarding this provision. Other states, like California and Colorado, incentivize taxpayers to make certain charitable contributions by offering state income tax credits equal to a specified portion of the contribution. These credits offset state income taxes dollar-for-dollar. According to the Tax Foundation, roughly one-third of taxpayers itemized deductions before tax reform, while fewer than 10% of taxpayers are expected to do so after tax reform.

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In the states starting with federal taxable income and some other states, like Missouri, the federal return determines the choice of whether or not to itemize. This choice deserves special attention for taxpayers in these states. Expect State Legislation As states react to the new tax reform bill, many states may find that legislative action is required. Most states will likely experience an increase in revenue due to the amount of base-broadening provisions in the new federal tax reform bill.

For this reason, many taxpayers will experience an increase in their state tax liabilities. RubinBrown expects a myriad of states will either propose cuts to individual and corporate income tax rates, decouple from some base-broadening provisions or take a creative approach to address the needs of taxpayers. Regardless of the approach, widespread changes in state taxation are assured in 2018 and the years following.

STATE & LOCAL TAX SERVICES GROUP

The RubinBrown SALT Services Group offers a complete range of consulting, compliance and dispute resolution services to meet the challenge of managing your growing operations. For more information, visit www.RubinBrown.com/SALT .

Jeff Schuetz, CMI Partner State & Local Tax Services Group 314.290.3375 jeff.schuetz@rubinbrown.com Rhonda Sparlin, CPA Partner-In-Charge State & Local Tax Services Group 303.952.1243 rhonda.sparlin@rubinbrown.com

Matt Cathcart Accountant State & Local Tax Services Group 314.678.3618 matt.cathcart@rubinbrown.com

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Tax Cuts & Jobs Act Resource Center

RubinBrown’s Tax Cuts & Jobs Act Resource Center, dedicated to the most significant overhaul to the U.S. tax code in 30 years, shares news and important updates regarding the Tax Cuts and Jobs Act (H.R. 1). Resources include:

∙ A comprehensive overview of the new tax law ∙ Industry-specific articles ∙ A rebroadcast of RubinBrown’s recent webinar detailing important changes in the new tax law

Visit the resource center at www.RubinBrown.com/HR1

If you missed RubinBrown’s webinar on the new tax law,

the rebroadcast is now available in the resource center. Listen to the special two-hour roundup of the changes included in the new tax law that will affect nearly every household and business presented by RubinBrown’s tax experts.

TAX REFORM: DIVING INTO INTERNATIONAL WATERS by Jeff Naeger, JD, CPA, Kirk Wonio, JD, CPA and Michael Bequette, CPA

The Tax Cuts and Jobs Act represents the largest tax overhaul in 30 years with the impact not only being felt domestically, but internationally as well.

Congress and the President’s Tax Cuts and Jobs Act of 2017 (the Act) appears to be an attempt to shift the tide of American economic activity back towards U.S. shores. There is an “America First” aroma weaving its way through the Internal Revenue Code changes. The intent of our top four international tax reforms discussed below, and other individual and corporate reforms discussed elsewhere in this publication, appears to be a genuine and likely effective attempt to create an environment that encourages more business investment domestically. Territorial System and the Dividends Received Deduction The most significant international reform is the move from taxing worldwide income to a territorial tax system. Under a worldwide tax system, U.S. companies with foreign operations pay foreign income taxes on offshore earnings and then again when that money is brought back home to the United States. A complicated set of rules helped relieve taxpayers from double taxation. In a territorial system, earnings are taxed where the earnings are generated and repatriations of cash back home to the U.S. are tax-free. A simple set of rules relieve taxpayers from double taxation called the participation exemption. Effective for distributions made after December 31, 2017, the Act implements the participation exemption allowing a 100% dividends received deduction on foreign- sourced dividends. The exemption only applies to dividends coming from foreign corporations and paid to a domestic corporation owning at least 10% of the foreign corporation. The domestic corporation must also hold the stock of the foreign corporation for more than 180 days during the year prior to the dividend. Foreign branch earnings of domestic corporations and capital gains (except section 1248 gains which are tax free) are not eligible for the participation exemption.

Repatriation Tax There is a toll charge or transition tax for our migration to a territorial tax system. The Act introduces a new tax on a mandatory deemed repatriation of foreign earnings.

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Global Intangible Low Taxed Income An exception to the territorial system of taxation is a new category of foreign income called Global Intangible Low Taxed Income (GILTI). If a U.S. taxpayer owns certain types of foreign corporations, there may be a U.S. minimum tax imposed on net income over a routine or ordinary return. The GILTI tax is intended to catch “mobile income” tax structures that allowed some multinational corporations to pay low to no taxes on offshore earnings. But in realty, GILTI throws a much wider net in the international waters. Lowering the corporate rate from 35% to 21% presumably reduces the incentives to shift profits outside the United States. The GILTI provision reflects a concern that the change to a territorial system could increase income-shifting strategies to low to no tax jurisdictions because any shifted profits could be permanently exempt from U.S. tax. The inclusion of GILTI in a U.S. shareholder’s income is intended to reduce income migration strategies by ensuring that controlled foreign corporations’ (CFC) earnings (those considered to be “non-routine”) are subject to a minimum amount of U.S. tax. The calculation for GILTI is based on a company’s qualified business asset investment (QBAI). QBAI are assets used by the taxpayer that are depreciable and do not include intangible property (i.e. patents, trademarks or other amortized assets). Income in excess of 10% of QBAI is “deemed intangible income.” For example, if a CFC has $100,000 of adjusted depreciable assets basis, then any earnings above $10,000 would be a GILTI inclusion.

We last saw a repatriation similar to this in 2004 under President George W. Bush, with the main difference being that the 2004 repatriation was optional.

It is called a deemed repatriation because the tax applies to most taxpayers. Whether or not cash is remitted to the U.S., the tax is assessed on accumulated post-1986 foreign earnings not previously taxed by the U.S. All post-1986 earnings held offshore in foreign corporations will be taxed at a rate of 15.5% if these earnings are held in the form of cash or cash equivalents. Earnings in excess of the cash and cash equivalent amount will be taxed at 8%. This change is enacted with the hope that money currently held off-shore in foreign jurisdictions by multinational companies will be brought back to the U.S. and redeployed. A further hope is that this cash will be used primarily as a source for new domestic investment by these multinational companies, creating new jobs and infrastructure. We last saw a repatriation similar to this in 2004 under President George W. Bush, with the main difference being that the 2004 repatriation was optional. While the 2004 ‘tax holiday’ did result in a big injection of money back into the U.S. economy with around $300+ billion brought back, it did not yield the anticipated results. Large portions of the money repatriated were instead used for stock repurchases and as distributions to company shareholders. With the current state of the economy at record highs, there is a possibility to see a different result this time around with more direct investment into infrastructure and job creation. Nonetheless, the economy should see an influx of cash that it would not have without the transition tax.

∙ GILTI threshold = Assets ($100,000) x 10%

∙ GILTI = Earnings above $10,000

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C-corporate taxpayers receive a 50% deduction on GILTI inclusions for tax years beginning after December 31, 2017, and before January 1, 2026, when it is then reduced to 37.5%. For C-corporations, foreign tax credits are allowed to offset U.S. tax on GILTI, but only up to 80%. Without the 50% deduction and ability to use foreign tax credits, a U.S. pass-through entity with foreign corporations in its structure could be hit especially hard. Foreign Derived Intangible Income Converse to the GILTI, the Act provides a 13.125% effective tax rate on excess returns earned directly by a U.S. corporation with income from products manufactured and services provided for consumption outside the U.S. The effective tax rate is achieved by allowing a 37.5% deduction for Foreign- Derived Intangible Income (FDII). A complex set of definitional rules determine the amount of a U.S. corporation’s FDII.

The reduced effective tax rate on FDII is intended to encourage U.S. corporations to keep or relocate service and production activities in the United States. Base Erosion Anti-Abuse Tax The Act added section 59A to the code which institutes a minimum tax on related party payments, which reduce U.S. taxable income. The tax applies to corporations with gross receipts of over $500 million for their previous three taxable-year’s period. This additional tax is called Base Erosion Anti-Abuse Tax (BEAT), and will generally be calculated at a rate of 10% (phased in at a 5% rate beginning in 2018 and increasing up to 12.5% by 2026) of modified foreign taxable income. The BEAT includes within its purview almost every outbound payment except for payments for inventory manufactured outside the United States, certain payments subject to U.S. withholding taxes and the participation exemption mentioned previously.

This 37.5% deduction is reduced to 21.875% starting in 2026.

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Looking Forward and Planning The implementation of tax reform will be an ongoing process over the next few years. As noted, some of the changes discussed are being phased in and some of the rates will increase in the coming years. In addition, there are numerous international changes not discussed, as well as the changes that are occurring domestically and even on state levels.

The consequences of these tax changes need to be on everyone’s minds for how they will affect not only the current years but also planning for the future.

TAX SERVICES GROUP

RubinBrown works with our clients to provide tax planning opportunities integrated with business operations to contain or reduce tax function costs, and integrate bottom line results through tax savings and added value. For more information, visit www.RubinBrown.com/Tax .

Jeff Naeger, JD, CPA Partner Tax Services Group 314.290.3461 jeff.naeger@rubinbrown.com

Steve Brown, CPA Chairman & Partner Tax Services Group 314.290.3326 steve.brown@rubinbrown.com

Tim Sims, CPA, CGMA Partner-In-Charge Tax Services Group 314.290.3434 tim.sims@rubinbrown.com

Kirk Wonio, JD, CPA Partner Tax Services Group 314.290.3335 kirk.wonio@rubinbrown.com

Henry Rzonca, CPA Partner-In-Charge Federal Tax Services Group 314.290.3350 henry.rzonca@rubinbrown.com

Michael Bequette, CPA Accountant Tax Services Group 314.678.3553 michael.bequette@rubinbrown.com

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Accounting & Business Professionals

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Tamara Tucker President 314.878.5522 tamara.tucker@abacusrecruiting.com

∙ Accounting/Financial Management

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Paul Iadevito Recruiting Manager 314.878.5522 paul.iadevito@abacusrecruiting.com

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Visit us at www.AbacusRecruiting.com

ABACUS RECRUITING IS AN AFFILIATE OF RUBINBROWN LLP

INDUSTRY UPDATE CONSTRUCTION

New Tax Law has Direct, Positive Impact on the Construction Industry by Tim Kendrick, CPA

T he Tax Cuts and Jobs Act of 2017 has already and will continue to create a ripple effect through every industry. However, the impact on the construction industry is almost completely considered positive. The highlights and benefits of the bill include a reduction in the corporate tax rate from 35% to 21%. Changes to accounting methods will ease tax burdens for many small contractors and the doubling of the estate tax exemption to $11 million will help the industry’s family-owned businesses.

The lower corporate tax rate will free up cash for construction firms to invest in their businesses through capital expenditures, new hires and increased salaries and benefits for employees. Construction firms set up as pass-through entities, including architectural and engineering firms, could see a reduction in their effective flow-through tax rate due to the new 20% deduction on pass-through income. The bill also includes massive changes to how income earned or kept offshore is treated.

20 New Tax Law has Direct, Positive Impact on the Construction Industry

Corporate Tax Reform Domestic corporations will experience one of the biggest benefits of the new tax reform bill with a 14% reduction in corporate tax rates. The new tax rates are effective as of January 1, 2018. C-corporation construction firms that regularly reinvest profits back into the company could see a significant benefit due to the tax rate reduction. Shareholders receiving dividends from corporate earnings and profits remain subject to double taxation. Corporate tax reform also includes the repeal of alternative minimum tax (AMT) and an 80% annual limitation of net operating loss carryforwards. Planning Item: Careful and diligent planning as to the appropriate tax structure (C-corporation versus flow-through) for construction firms should be considered for the 2018 tax year and going forward. The advantages and disadvantages of each tax structure must be taken into account including internal and external factors affecting the business. Increased Relief for Small Taxpayers: Small Contractor Exemption The tax reform bill expanded the completed contract and cash method of reporting rules to taxpayers with less than $25 million in gross receipts from the original $10 million threshold, thus giving construction firms a large tax benefit.

The increase to $25 million is a nice opportunity for small contractors who have outgrown the original $10 million threshold. The small contractor exemption applies to taxpayers with less than $25 million in gross receipts computed on a prior three year average. Small contractors can choose any accounting method, typically either the cash or completed contract method that represents the greatest deferral of income. Percentage-of-completion should still be used for contracts expected to last more than 24 months from the date of inception. Those contractors that enter into joint venture agreements may need to aggregate gross receipts of all the applicable entities when computing the $25 million gross receipt average. For contractors switching to the completed contract method, this change is to be applied on a cut-off basis. Contracts entered into after December 31, 2017, will be computed on the completed contract method while contracts entered before January 1, 2018, must continue to use the original method of accounting, which more than likely was percentage-of-completion method. An example of the percent complete profit and tax completed contract profit recognized under the small contractor exemption can be viewed in the Completed Contract Adjustment figure below.

Completed Contract Adjustment Book Versus Tax Gross Profit

Estimated Gross Profit

Job to Date Revenue

Job to Date Costs

Job to Date Book Profit

Job to Date Tax Profit

Contract Amount

Construction Costs

Percent Complete

Contract #

001

10,000,000

8,500,000

1,500,000

5,000,000

4,250,000

50.00%

750,000

0

Caution: Unfortunately, contractors must still compute income for AMT purposes under the percentage-of-completion method, thus requiring an addback from the completed contract method for pass-through entities.

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Pass-Through 20% Deduction The tax reform bill increased tax relief for pass-through entities creating up to a 20% deduction of income from a qualifying pass-through. Beginning in 2018, the 20% deduction includes construction, homebuilding, engineering and architectural firms, but does not include other service-based businesses where the principal asset is the reputation or skill of one or more employees or owners. Overall, the 20% deduction is computed based on the entity’s income and is limited to the greater of either 50% of the company’s W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted depreciable basis of the qualifying property. This new deduction could reduce the effective federal tax rate of pass-through income to 29.6%. Planning Item: If a company doesn’t expect to receive the full 20% deduction due to having minimal W-2 wages, then careful planning should be performed before the end of the 2018 tax year to maximize the deduction. Capital Expensing All construction firms will see an immediate tax benefit due to the expanded rules to bonus depreciation and section 179 expensing. For both new and used assets placed in service after September 27, 2017, taxpayers will be able to elect 100% bonus depreciation. Bonus depreciation is not subject to taxable income limitation and an investment limitation.

The annual maximum amount that can be expensed under section 179 has been increased to $1 million. The $1 million limit is reduced dollar-for-dollar to the extent the total cost of section 179 property placed in service exceeds $2.5 million and the section 179 expense cannot generate a taxable loss. Caution: If an asset had a written binding contract in place as of September 27, 2017, then the asset is subject to the original bonus rules: 50% in 2017 is available only on new assets. Entertainment and Meal Expenses The cost of entertainment and employer- provided meals increased due to the tax reform bill. Starting in 2018, entertainment expenses are now 100% non-deductible. Entertainment expenses are typically any activities related to amusement, recreation and sporting events. providing food and beverages to employees through an eating facility or meals on the premises of the employer. Under the prior tax law, employer-provided meals on the premises of the employer were 100% deductible and entertainment expenses were 50% deductible. Interest Expense Limitation The new tax reform bill potentially limits the deduction of interest expense. Construction and homebuilding firms with significant debt on the books are limited to deducting interest up to 30% of the business’s adjusted taxable income beginning in 2018. There is also a new 50% limitation for employer expenses associated with

22 New Tax Law has Direct, Positive Impact on the Construction Industry

Adjusted taxable income is calculated as taxable income before deductions for interest expense, net operating losses, depreciation, taxes and amortization expense. The amount of interest expense that is limited is carried forward indefinitely and the disallowance is regarded at the filer level, not at the taxpayer level for partnerships. Individual Tax Changes Many changes to individual income taxes will impact owners of construction firms set up as pass-through entities. The changes are set to begin in 2018, with many being only temporary and set to expire in 2025.

∙ The schedule A state and local tax itemized deduction is capped at $10,000 ∙ Excess business losses from a flow-through entity are limited to a deduction of $250,000 or $500,000 for single and joint filers, respectively (taxpayers must also consider their tax basis, at risk and passive activity loss rules when computing the deduction) ∙ Repeal of the 2% miscellaneous itemized deduction Many of the tax legislation changes require further clarification from the IRS through final regulations, rules and procedures. Ultimately, this may take months or years. The overall impact on the construction industry will take years to determine. Careful planning and discussions with your tax advisor should be performed in 2018 and future years to ensure you are maximizing the benefits of the new tax rules. ∙ Repeal of the 9% domestic production activities deduction

A short list of the individual tax changes include:

∙ Highest individual income tax rate dropped from 39.6% to 37%

∙ AMT was retained but the exemption amounts and phase-out thresholds were increased ∙ Standard deduction increased to $12,000 and $24,00 for single and joint filers, respectively, and personal exemptions are eliminated

CONSTRUCTION SERVICES GROUP

RubinBrown provides services to general contractors, specialty subcontractors and related companies in the construction industry. For more information, visit www.RubinBrown.com/Construction .

Ken Van Bree, CPA, CGMA Partner-In-Charge Construction Services Group 314.290.3429 ken.van.bree@rubinbrown.com

Mark Jansen, CPA, CGMA Partner & Vice Chair Construction Services Group 314.290.3208 mark.jansen@rubinbrown.com

Matt Beerbower, CPA Partner & Vice Chair Construction Services Group 303.952.1252 matt.beerbower@rubinbrown.com

Tim Kendrick, CPA Manager Construction Services Group 314.290.3431 tim.kendrick@rubinbrown.com

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INDUSTRY UPDATE HEALTHCARE

Tax Cuts and Jobs Act: A Healthcare Perspective by Tom Zetlmeisl, CPA, CFE, CFF, CGMA

T he Tax Cuts and Jobs Act affects that are either specific to healthcare or impact many healthcare organizations. In addition, because the healthcare industry has many not-for-profits, the significant changes from a not-for-profit perspective flow through to those healthcare entities that are also not-for-profits. healthcare organizations and doctors in several ways. It includes provisions Healthcare-Specific Provisions Likely the most prominent impact from a healthcare perspective is that the Affordable Care Act (ACA) individual health insurance mandate was essentially repealed for months beginning after December 31, 2018.

For 2019, the penalty (shared responsibility payment) for failing to have minimum essential health insurance is zero. For 2018, the flat dollar amount for the penalty will be $695 plus an inflation adjustment (with a $2,085 maximum as of 2017). The coverage rules for employees were not addressed, nor was the premium tax credit. It is unclear what the overall impact of this will be on the ACA more broadly. However, as it relates to the insurance exchange, this will likely drive down the number of healthy individuals purchasing on the exchange, resulting in a negative impact on payors and increased premiums.

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There are additional healthcare-specific provisions associated with the Act. The resolution reached by the Senate and House in early 2018 to avoid government shutdown includes delaying the implementation of three healthcare taxes created by the ACA: ∙ The moratorium on the medical device excise tax is extended through 2019; if no further changes are made, the 2.3% tax will apply to sales of devices after December 31, 2019 ∙ The delay in the implementation of the excise tax on high cost employer- sponsored health coverage (Cadillac plans) is extended to the taxable year beginning after December 31, 2021 ∙ The suspension of the annual fee on certain for-profit health insurance providers is continued through December 31, 2019 As part of the government resolution, the federal funding was extended for the Children’s Health Insurance Plan (CHIP), which provides low-cost health coverage to children in families that earn too much money to qualify for Medicaid but not enough to buy private insurance. The extension covers the next six years (through fiscal year 2023). However, the ACA-enhanced federal match only continues through fiscal year 2019 and then is reduced by half in fiscal year 2020. The federal match returns to the regular CHIP rate following that reduction. Healthcare Not-For-Profit Provisions The healthcare industry has many mission based not-for-profits, including some of the largest hospital systems in the country. The Act impacts tax-exempt providers in several ways, including tax rates on unrelated business income, executive compensation (excise taxes) and interest from advanced refunding bonds. Additionally, the estate tax incentive for bequests to charitable organizations has been altered, while the tax percentage remains the same.

Tax rates on Form 990-T for unrelated business income for incorporated entities will be a flat 21% for tax years beginning after December 31, 2017. This means there is no blended rate for fiscal year filers. A new excise tax will apply to tax-exempt organization executive compensation. An excise tax of 21% will apply to the highest paid employees who receive pay in excess of $1 million during a taxable year or who receive an “excess parachute payment” at separation — even if the covered employee’s pay does not exceed $1 million. Separation payments in excess of three times the average salary from the last five years are deemed excessive. Vesting of nonqualified deferred compensation (so called section 457(f) plans) could trigger this tax. The employer pays the excise tax. Employees in medical professions may be excluded from “covered employees” with regard to the performance of medical services. The provision applies for tax years beginning after December 31, 2017. Interest on advance refunding bonds will be taxable for refunding bonds issued after December 31, 2017. Unrelated business income (UBI) will need to be calculated separately for each trade or business carried on. The provision is intended to prevent losses from one activity offsetting income from another activity. The transition rules for net operating losses (NOLs) arising in tax years beginning before January 1, 2018, appear to be taxpayer friendly. The provision is effective for tax years beginning after December 31, 2017. UBI is increased by the amount of certain fringe benefits. The Act requires unrelated business taxable income to include most expenses paid or incurred by a tax-exempt organization for qualified transportation fringe benefits such as, a parking facility used in connection with qualified parking or any on-premises athletic facility. In other words, if a for-profit business cannot deduct such expenses under the amendments made by the Act, then a tax- exempt organization will generally have to

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