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Gilmore Jasion Mahler Tax Partner Deanna Hall has over twenty years of public accounting and private industry experience. She works with businesses across many industries, with a focus on manufacturing.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.  

The Tax Cuts and Jobs Act signed into law on December 22, 2017 has businesses and individuals around the country trying to get a handle on how the new law affects them. Northwest Ohio is no exception. Many are looking for direction from Gilmore Jasion Mahler (GJM) tax experts. Should they change the classification of their business to take advantage of the new 21% corporate tax rate? How have business deductions changed? What does the new standard deduction mean for their families?

Hundreds turned out for GJM education sessions on the new tax law held in both Maumee and Findlay the first week of February. Tax partners Charlie Heid, CPA and Steve Schult, CPA presented on the big changes for individuals and businesses. Their presentations were followed by a GJM panel of tax experts who tackled some questions on the new tax law's impact.

The GJM panelists included: Tax Partners Dave Baymiller, CPA, Deanna Hall, CPA, Kathi Iott, CPA, Chuck Stumpp, CPA, and Jaimee Weaver, CPA. GJM Managing Partner Kevin Gilmore, CPA welcomed the attendees to the sessions.

“The law passed quickly, just before Christmas and people and businesses haven’t had much time to get a handle on its impact,” says Gilmore. “The new law is anything but tax simplification. We knew our education sessions would help people get a better grasp, but we’ve encouraged all of the attendees to reach out to their tax professionals to discuss their individual situations.”

Major changes for businesses within the Tax Cuts and Jobs Act include:

-Corporate tax rate reduced to a flat 21%

-Corporate Alternative Minimum Tax (AMT) repealed

-Pass-through businesses (businesses that pass their income through to the personal level for tax purposes): 20% deduction of income. Effective tax rate on qualified income will be reduced to 29.6%  

-Sec. 179 limit increased to $1M from $510,000 for property in service after 12/31/17.

-100% bonus depreciation for qualified property acquired and placed in service after 9/27/2017 and before 1/1/23.

-Limits on business interest deduction

-New restrictions on deduction of fringe benefit expenses:

• Entertainment expenses are now nondeductible
• Business meals remain deductible at 50%
• Meals provided for the convenience of the employer are reduced to 50% deductible, but only through 2025

-NOLs (Net Operating Losses): 2-year carryback repealed, 20-year carry forward changed to indefinite, 80% taxable income limitation on usage

-Tax credits retained include:

• Research and Development Tax Credit
• Work Opportunity Tax Credit

Among the changes for individuals under the new tax law:

-Standard deduction essentially doubled (through 12/31/25) to $24,000 (filing jointly) and $12,000 for individuals.

-Itemized deductions no longer allowed include:

• Tax prep fees
• Investment advisory fees
• Unreimbursed employee business expenses

-Itemized deductions also impacted:

• State and local taxes still deductible, but now limited to $10,000
• Mortgage interest now deductible only on the first $750,000 in debt for primary or secondary homes

-Affordable Care Act individual mandate penalty eliminated

-Child tax credit increased to $2,000 for children under 17

-Alimony is not deductible or includable in income related to divorces after 12/31/18

-Estate Tax is not repealed

Many of those attending the education sessions were looking for some clarity on the new rules for pass-through businesses. GJM Tax Partner Dave Baymiller says those pass-through businesses that qualify for the 20% deduction include:

• Partners in partnerships/LLC’s
• "S" corporation shareholders
• Sole proprietors (reported on Schedule C)
• Rental real estate (reported on Schedule E)

He says there are some limitations depending on your taxable income.

“The 20% deduction is limited based on taxable income level, amount of compensation paid by business and/or amount of business property owned,” says Baymiller. “The deduction limitations for what are called specified service businesses are much more severe.”

Baymiller says many businesses are also looking for clarification on what qualifies as a “specified service business”. He says they include:

• Healthcare professionals (physicians, nurses, dentists)
• Lawyers, accountants
• Financial, brokerage, investing, and investment management services
• Consultants
• Any business where the principal asset of such business is the reputation or skill of one or more of its employees or owners (the IRS has not issued any guidance on how to interpret this)

If you're looking for more detail, Dave has written a more in depth article on the impact of tax reform on pass-through entities. GJM’s Tax team says many businesses are also trying to determine if they should consider converting from an "S" corporation to corporation (or "C" corp) to take advantage of the reduced corporate tax rate. An "S" corp is a pass-through business in which income "passes through" to the owner's personal tax return. A corporation or "C" corp would be subject to corporate taxation.

It sounds like a simple question, but the answer is anything but simple. Tax Partners Deanna Hall and Chuck Stumpp walked through an example for attendees of a business with a million dollars of taxable income that factored in:

• Taxes paid at corporate level
• Taxes paid at shareholder level
• Taxes paid on cash withdrawn from the business (federal tax on "S" Corporation distributions or federal tax on corporate dividends)

“What we wanted to show is that every business is different,” says GJM Tax Partner Deanna Hall. “Depending upon a number of factors it could make sense for your business to incorporate to take advantage of the new low corporate tax rate, but it may not. That’s why it’s so important to talk to your tax advisor to come up with an individualized plan.”

Many attendees said they walked away with a much better idea of the impact of the Tax Cuts and Jobs Act on their personal and business tax strategy. GJM presenters made it clear that every situation and every business is different, and stressed the importance of a one on one discussion with your tax professional. GJM tax experts are already having these important discussions with clients to ensure the smartest tax strategy for 2018. Learn more about GJM’s approach to tax strategy.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

On December 22, 2017, our President signed into law the Tax Cuts and Jobs Act, the largest major tax reform in over 30 years. Within this Act are major changes to the taxation of regular corporations (C corporations) and to non-corporate taxpayers, which include individuals, estates, and trusts who own interests in what are called pass-through entities such as sole proprietorships, partnerships, limited liability companies (LLCs), and S Corporations. These entities are for the most part not subject to entity level tax, but instead pass the income through to their owners who are then taxed on the income.

This article will focus only on the pass-through entity income tax changes that came about as a result of the tax rate benefit provided to C corporations limiting the tax rate to a flat 21%, a key component of tax reform. Before I get into the meat of the changes, let me just warn you that we will need a whole lot more guidance coming from the IRS and Treasury in order to understand how this all works.

Let's start out with some basics:

• The new rules are effective for tax years beginning after December 31, 2017 and expire after December 31, 2025
• There is a deduction for individuals, estates, and trusts equal to 20% of domestic "Qualified Business Income" (QBI), which is defined below, from a pass-through entity
• Since the maximum individual income tax rate is now 37%, the 20% deduction provides an effective top marginal tax rate of 29.6%
• QBI would include Specified Service Trade or Business, which is defined below

Definitions in Basic Terms

Qualified Business Income (QBI): The net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade or business of the taxpayer and it doesn't matter if the taxpayer is "Active" or "Passive" in the business. This is determined for each qualified trade or business of the taxpayer.

Specified Service Trade or Business:

Any trade or business involving the performance of services in the fields of health, law, 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 one or more of its employees or owners; or involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities. Engineering and architectural services are excluded. This is a definition that needs a whole lot of clarity, which hopefully will be provided soon. For example, what are included in services in the fields of health? How do you determine what business has a principal asset being the reputation or skill of one or more of its employees or owners? Couldn't this pull in a lot of companies that you wouldn't normally think of as service businesses? And would this trump the exception for architectural and engineering services? Stay tuned.

Threshold Amount:

These are individual taxable income amounts that, if exceeded, cause the 20% deduction to be phased out. The starting threshold amounts are $157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly. Once the taxable income exceeds $207,500 (or $415,000 for joint filers), you are fully phased in, and for owners of Specified Service Trade or Businesses, the deduction is $0. For other businesses that exceed the threshold amounts, the deduction is limited to what is called a "Wage (Capital) Limit" (Hmmm, sounding a bit complicated).

Wage (Capital) Limit:

The greater of:

(a) 50% of your share of the W-2 wages paid with respect to the qualified trade or business or

(b) The sum of 25% of your share of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property (basically, this is depreciable property cost).

The (b) above was an additional provision added to allow for businesses with low or no wages to qualify, such as real estate businesses. (Uh-oh. Sounding more than a bit complicated here).

Qualified Trade or Business:

Basically any trade or business other than a Specified Service Trade or Business and other than the trade or business of being an employee.

Some other important points:

• The 20% deduction is a deduction against taxable income and not adjusted gross income (AGI)

• The 20% deduction cannot exceed your taxable income reduced by net capital gain for the year

• If your individual taxable income (AGI at the bottom of page one of your Form 1040, less itemized deductions) is less than the threshold amounts, you do not need to worry about the definition bullet point for Specified Service Trade or Business or Wage (Capital) Limit

Example: Easy one first, which is based on taxable income below the threshold amounts.

You are a single taxpayer with taxable income of $157,000. This is below the single threshold of $157,500 so all we care about is QBI. You have QBI from your 100% owned S Corporation of $100,000. Your deduction is 20% of $100,000 or $20,000. It doesn't matter whether you are a Specified Service Trade or Business or not. Any Specified Service Business or Qualified Trade or Business qualifies for this.

Dealing with Threshold Limitations and Exceptions

Now, we move to taxpayers with taxable income in excess of the above Threshold Amounts ($157,500 or $315,000), where the deduction is subject to phase-in rules. So, now we need to take into consideration the Specified Service Trade or Business as well as the Wage (Capital) Limit.

Unfortunately, the limitation on the 20% deduction is computed differently for businesses that are Specified Service Trade or Business and all other Qualified Businesses.

I am going to begin with Specified Service Trade or Businesses. In computing the qualified business income, the taxpayer takes into account only the applicable percentage of qualified income, gain, deduction, or loss, and of allocable W-2 wages. The applicable percentage with respect to any taxable year is 100%, reduced by the percentage equal to the ratio of: (the excess of the taxable income of the taxpayer over the threshold amount) to $50,000 ($100,000 with a joint return). What the heck does that all mean?

Let's look at an example to make this clearer, but I am only going to use the 50% Wage Limit and not the 25% wage plus 2.5% of capital to try to simplify it.

Example: Specified Service Trade or Business

A single taxpayer owns 100% of an S Corporation and has taxable income of $182,500 — of which $150,000 of this is QBI due to providing services in the field of health after paying wages of $100,000 to employees and herself. She has an "applicable percentage" of 1 - ($182,500-$157,500) / $50,000, which is equal to 50%.

Then, 50% is applied to the QBI of $150,000, or $75,000. Then, we have to determine the includible wages, which is 50% of $100,000, or $50,000. The deduction is then the lesser of 20% of $75,000 ($15,000) or 20% of $50,000 ($10,000), which leaves the deduction for the single taxpayer who is over the threshold amount at $10,000.

What if the taxable income is $207,500? With the same factors above, the deduction would be "applicable percentage" of 1 - ($207,500-157,500) / $50,000, which equals 0, which means that there is $0 deduction. For Specified Service Trade or Business income, the deduction can be totally eliminated.

This total elimination, however, does not apply to Other Qualified Businesses.

Let's move to Other Qualified Businesses. If the taxable income exceeds the threshold amount, the Wage (Capital) limitation applies. If the maximum threshold is met, the Wage (Capital) limit applies fully.

The tentative deductible amount for these other businesses is equal to the lesser of 20% of the qualified business income with respect to such trade or business or the greater of (a) 50% of the W-2 wages with respect to that business, or (b) 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property (the Wage (Capital) Limit). The one big difference with this computation is that there is not a "1 minus a percentage" as in the computation for Specified Service Businesses.

Again, what does this mean?

Another example, and again I am only going to use the 50% Wage Limit and not the 25% wage plus 2.5% of capital to try to simplify it. This example is complicated.

Example: Other Qualified Business

Same facts as above, except I am changing wages to $50,000 to show the full effect of the wage limitation. The Qualified Business manufactures widgets.

(a) is 20% of QBI of $150,000, or $30,000.

(b) Is 50% of W-2 wages of $50,000, or $25,000.

Since (b) is less than (a), the application of the wage limit applies.

The wage limit computation is as follows: ($182,500-$157,500) / over $50,000, which equals 50%.

(a) Above of $30,000 is reduced 50% of the difference between (a) and (b) = $30,000-$25,000 x 50%, which equals $2,500.

Therefore, the taxpayer's deductible amount is $30,000-$2,500 = $27,500.

What if the taxable income is $207,500? With the same factors above, the wage limit computation is as follows: ($207,500-$157,500) / $50,000 equals 100%.

(a) Above of $30,000 is reduced by 100% of the difference between (a) and (b), which equals 5,000 x 100%, or $5,000.

Therefore, the taxpayer’s deductible amount is $30,000-$5,000 = $25,000, which is equal to the 50% of wages limitation.

If all of those figures and equations have your head swimming, don’t panic. That’s what your tax professional is for; to help walk you through all of this. If you haven’t already reached out to him or her for a conversation on the impact of tax reform on your business, I suggest you do so right away.

Also keep in mind there are a number of other issues related to this whole pass-through business benefit. We shall see what comes out of the additional guidance by the IRS and the Treasury, which will allow us to really explore the opportunities and plan accordingly.

One question that has surfaced is whether a pass-through business should just convert to a C Corporation and get the benefit of the 21% tax bracket on all of the C Corporation taxable income.

I will tell you right now that there is no one size that fits all, and care should be taken and due diligence done to understand all of the issues associated with being a C Corporation as it relates directly to the business activity as well as to the owners instead of just blindly converting.

This is all going to be such fun, don't you think?

David Baymiller, CPA contributed this blog. A partner in GJM’s Tax Department, Dave has over 35 years of public accounting experience with an emphasis on tax planning and consulting. Dave recently joined other GJM experts to present an education session on the Tax Cuts and Jobs Act. The event offered information on key changes for individuals and businesses as a result of the new law.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities. 

New lease accounting standards will go into effect for public companies for years beginning after December 15, 2018 (2019 year-end) and for private companies for years beginning after December 15, 2019 (2020 year-end). Those affected by the changes should be aware of the details and begin planning for implementation now. Planning will include heavy training for accounting departments as well as vendors and customers.

New Lease Accounting Rules

The Financial Accounting Standards Board has issued new rules to improve the financial reporting of leasing transactions. New requirements dictate that companies leasing facilities and equipment to others recognize the assets and liabilities of leases. Balance sheets must record the transaction details. Prior to this implementation, capital leases were the only type to require such documentation.

Establish a Committee

To guide the transition process, affected companies should establish committees to attend training events and become knowledgeable about the new standards. The group should be comprised of both accounting personnel and cross-functional project managers. The committee can then work to implement the process in a way that will work for the organization.

Educate Dealers, Vendors, and Customers

The Equipment Leasing and Finance Association has created a helpful white paper outlining the new method’s changes and benefits. Stakeholders should engage in conversations directly with the companies and receive this reading material for reference.

Corporate Accounting Teams

There are three factors for companies to consider, in addition to those listed above:

1. Accounting teams will need to identify all leases, preparing a current and accurate inventory. Once complete, the accounting team will be able to determine which leases the new mandate affects. It is also important to break out leases that are less than a year (and not reasonably certain that they will be renewed) as they may not be required to be capitalized as a right of use asset.

2. Accounting departments will need to examine how the new rules will change financial reporting and transactions, specifically for the company. In addition to examining basic paperwork changes, teams will also need to determine possible ripple effects, including those on taxation and business processes. It is important to accurately record the leases by breaking out the lease and non-lease components.

3. Accounting teams will need to determine whether current accounting systems can adequately handle the required changes. If accounting software or systems cannot handle the change, the team will need to work toward a solution. To assess the current systems, determine how easy it will be to create the proper accounting procedures. Not all software is designed to handle the change to the leasing standards. There is software that purports the use of algorithms to extract lease components from contracts to help with the efficient review of the contracts for lease components.

Making the Transition Smooth

The key to making the transition smooth for everyone is to plan early. Ensure everyone is onboard and educated before changes take place. With cross-functional collaboration, employees will be able to identify potential challenges and opportunities. Begin planning now to ensure a smooth process by meeting with your lessors to discuss the impact of the new leasing standards.

Whether you have a small business or a huge conglomerate, contact Gilmore Jasion Mahler to find out how we can help you prepare for the new lease accounting standards.

Gilmore Jasion Mahler Partner Michael Brough contributed this blog. Mike is a partner in the Gilmore Jasion Mahler assurance department with over 13 years of public accounting experience. Mike is a member of GJM's Manufacturing Specialist Group and works with clients in many other industries as well, including government and nonprofit.

Established in 1996, Gilmore Jasion Mahler, LTD (GJM) is the largest public accounting firm in Northwest Ohio, with offices in Maumee and Findlay. Locally owned, GJM offers cloud-based accounting services and provides comprehensive services including assurance, business advisory, tax, risk advisory and healthcare management. The Firm’s professionals specialize in industries including construction & real estate, healthcare, manufacturing & distribution and utilities.

A familiar face has returned to Gilmore Jasion Mahler. Lauren Webber is back on board as a Tax Supervisor and member of GJM's Construction Specialist Team and Manufacturing Specialist Team. Enjoy this Q&A. Welcome back, Lauren!

When did you start employment at GJM? 10/28/19 – formerly employed 2015-2017

Why did you choose the accounting industry? I like working with people and numbers.

What do you like best about accounting? Helping people solve problems/reach goals.

Are you from the Toledo area originally? If not, where are you from? I am from Toledo.

What do you like about living in Northwest Ohio? I love the greater Toledo area!  It’s a community-minded and engaging place to be.

Anything you’d like to share about your past professional experience? I am proud to have been the Owens Corning Volunteer of the Year in 2018.

Do you have any pets, hobbies, family? I have way too many pets- cats, dogs, fish, reptiles, small mammals, you name it.

How do you like to spend your free time? With pets/family/friends.  I also enjoy running, painting, reading, playing piano.

Favorite song or music? That’s too hard to pick!

Favorite book or movie? Book- A Prayer for Owen Meany by John Irving | Movie- Donnie Darko

Are you involved in any community organizations, do any volunteer work? I am the treasurer for Paws & Whiskers Cat Shelter and for Toledo Streets Newspaper.

What is something people may be surprised to find out about you? I hope to have farm animals one day.