December 6, 2017
There is always uncertainty when it comes to year-end tax planning, but this year is particularly challenging with the prospect of tax reform as proposed by the House and Senate. Fortunately, there is sufficient information available on the proposed changes that businesses can move forward with tax planning actions before year-end while maintaining a watchful eye on Washington.
Without tax reform, business tax rates would stay consistent for 2017 and 2018 and tax deferral would be a welcome strategy for most. Acceleration of deductions and deferral of income becomes even more advantageous if tax reform efforts are successful. Currently, the tax reform bills both advocate for corporate tax rates at 20% (25% potential for personal service corporations). In addition, final reconciliation of the bill may include the repeal of the alternative minimum tax. Both tax bills also call for a reduction of tax on pass-through entities. The House bill would reduce the tax rates applied to pass-through entity income and the Senate bill would provide a deduction for certain qualified business income. Absent special situations, such as leverage of the lowest corporate marginal rate of 15% in 2017 or planning for net operating loss expiration, many businesses may want to maximize an income deferral strategy in 2017.
Significant incentives for acquisition of fixed assets still exist in 2017. Section 179 allows businesses to deduct 100% of the cost of qualifying asset purchases up to $510,000, assuming your total qualifying asset additions do not exceed $2,030,000. Both tax bills contain provisions to enhance this deduction, with the House bill allowing for an expensing limit capped at $5,000,000 and the Senate bill expanding the definition of qualifying property to include previously ineligible assets. However, these provisions are set to be effective for tax years beginning in 2018. Taking advantage of the 2017 expensing will further allow for the deferral of income into future years, when tax rates may be lower.
Bonus depreciation allows for the deduction of 50% of the cost basis of newly acquired assets in 2017. Both tax bills propose increasing the deduction to 100% for assets in service after September 2017 and before tax year 2023, with the House bill even allowing “used” property to qualify. Regardless of whether a final bill is passed before year-end, taking advantage of bonus depreciation, even at the 50% level, may make sense to lower your 2017 tax bill.
Also, keep an eye on the tax bills before purchasing a vehicle before year-end. Under current law, luxury automobiles used in business are subject to limited depreciation. Both tax reform bills increase the depreciation available for luxury automobiles, but the increased depreciation may not apply unless the vehicle is acquired after 2017.
Taxpayers may also want to take advantage of the ability to expense de minimis purchases of tangible property. Adoption of a de minimis safe harbor capitalization policy up to $2,500 per item per invoice (or up to $5,000 with an applicable financial statement) will result in current year deduction of these items as opposed to capitalization.
Retirement plan contributions and year-end bonuses (meeting certain requirements) continue to be win-win moves for businesses – reducing taxable income while increasing employee morale. Charitable contributions will also continue to help reduce taxes in 2017, subject to certain limitations. Some taxpayers may also benefit from prepayment of 2018 expenses in the current year.
In addition to increased expenses as outlined above, deferral of income may also make sense to take advantage of potentially lower rates in 2018. Cash basis businesses may be able to defer invoicing customers to avoid receipt prior to year-end, further pushing income into 2018. Both tax bills also contain provisions that would allow more businesses to utilize cash method accounting for tax purposes beginning in 2018.
If you are generating net operating losses for 2017, consider using this to your advantage by recovering taxes paid in prior years. Under current law, net operating losses are required to be carried back two years unless the entity elects otherwise. If tax reform does indeed result in lower future tax rates, carrying the net operating loss back two years would likely be advantageous since the higher rates in those years probably resulted in higher taxes. Both tax bills propose eliminating the carryback opportunity after 2017.
Taxpayers considering a like-kind exchange of property other than real estate will also want to pay attention to the tax reform endeavors. Both tax reform bills contain provisions to limit nonrecognition transactions to real property. This requirement would be effective for exchanges after 2017, so accelerating nonqualifying exchanges into 2017 could make sense.
Every taxpayer’s specific situation needs to be reviewed to determine what planning steps are appropriate. With so many provisions potentially changing pursuant to the tax bills proposed by Congress, this becomes even more critical. Now more than ever, don’t procrastinate.
You do not have to go it alone. Start considering what provisions may apply to your situation and contact JPS. It is our pleasure to assist you and your business to >Be Greater.
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