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It’s the Most Wonderful Time of the Year…-End Planning! – Business Edition

Author: John Richards, Tax/Audit Associate

It’s the Most Wonderful Time of the Year…-End Planning! – Business Edition! (Revised December 11, 2017)

With the passing of the Senate’s version of the tax bill, Congress now moves to reconcile the differences between the two bills which will likely pass with most provisions effective after December 31, 2017. In our last blog, we noted the significant differences between the two bills as it pertains to individual taxpayers; now let’s look at some of the year-end planning that business taxpayers may want to consider before this year ends.

Take a look at these proposed changes

Provision

Current Tax Law

Senate

House

Consideration

Corporate Tax Rate

Corporations are taxed on
a graduated rate of 15%, 25%, 34%, and 35%. Personal service corporations are
taxed at a 35% rate. I.R.C. § 11

Reduces rate to 20% –
Permanent and effective in 2019

Reduces rate to 20% –
Permanent and effective immediately

None

Depreciation:

Bonus Depreciation

Allowed a 50% bonus
depreciation allowance for qualified property placed in service in 2015 –
2017, and 40% in 2018

 

– Increases to 100% in
2018

– Decreases to 30% in
2019

– Allows used property if
it’s the tax payer’s first use

– 100% bonus is only
applicable to qualified property acquired after 9/27/2017

– Includes qualified
film, television, and live theatrical productions

– Removes computer/peripheral
equipment as “listed property”

Same as the Senate with
the exception of the last two bullets

 

Acquire and place
equipment in service before 12/31/2017:

– If tax reform does not
pass, taxpayer gets a 50% bonus in 2017; 40% bonus after 2017

– If tax reform does
pass, taxpayer gets 100% bonus on property acquired after September 27, 2017

Section 179

Small businesses are
allowed to deduct up to $500K (with a $2-million phase-out starting
point) of certain property placed in service each year, subject to
limitations

– Increases deduction limitation
to $1MIL

– Increases phase-out
threshold to $2.5MIL

– Includes improvements
to nonresidential property placed in service after the date underlying
property was first placed in service (i.e. roofs, heating, ventilation, fire
protection, etc.)

 

 

 

– Increases deduction
limitation to $5MIL

– Increases phase-out
threshold to $20MIL

– Includes energy
efficient heating and air conditioning units as qualified real property

Defer qualifying property
purchases above the current $500K/$2MIL cap to 2018

Real Property Recovery Period

Most non-residential, and
residential real property
must
be recovered over 39 and 27.5 years, respectively, using
straight –line depreciation

Shortens recovery period
for both to 25 years, effective in 2018

No change

Delay placing building
and real property into service until 2018 to gain the shorter recovery
period, based on the effective date

Luxury Auto

Allowed max deductions of

Y1 – $3,160

Y1 – $8,000 bonus
depreciation

Y2 – $5,100

Y3 – $3,050

Y4+ $1,875 until cost of
vehicle is fully recovered

 

– Increases, effective
2018, to:

Y1 – $10,000 *

Y2 – $16,000

Y3 – $ 9,600

Y4+ $5,760 until cost of
vehicle is fully recovered

 

*Unclear if $8K 1st year bonus deduction can still be taken

Consistent with the
Senate’s bill

Defer purchase of business-use
vehicle until 2018. Even without the bonus depreciation, the combined increase
of the first and second year write-offs be a higher deduction that the immediate
$11,160 if purchased in 2017

Employee-Related Expenses

Meals and entertainment

Allowed a 50% deduction for work-related entertainment expenses
which include meals, club dues, amusement and other recreation expenses

 

– Repeals all entertainment expenses

– Expands 50% limitation on deductions for meals to include
in-house cafeteria provided to employees

– Disallows deduction for meals on or near the employer’s
business premises for tax years beginning after December 31, 2025
 

– Repeals all entertainment expenses

– Meals that are not “entertainment” would remain subject to the
existing 50 percent allowance

– Business entertainment events for employees generally would be
100 percent non-deductible, with an exception for food and beverages provided
on the premises of the employer

– “Cash basis” taxpayers might consider making entertainment
purchases in 2017 (i.e. sporting events) to include as 2017 expense

– if applicable, reconsider subsidies to in-house employee
cafeterias

– Reconsider commitments made to employees as it relates to
entertainment or fringe benefits (i.e. gym memberships, reimbursed entertainment
expenses)

Transportation

Transit, commuter highway vehicle, and qualified parking
incentive up to $255 per month; $20 per qualified bicycle commuting growth

Specifically repeals the bicycle commuting expense exclusion
effective as of January 1, 2018

Repeals deduction

Reconsider commitments made to employees

 

Employee Achievement Awards

Exclusion limited to
$1,600 for qualified plan, and $400 for nonqualified plan subject to special
ruling

No change in definition and dollar limits, but new limits on
eligible “awards” given which includes: no deduction for cash, gift cards or
gift certificates, vacations, meals, lodging, tickets to theater/sporting
events

Repeals deduction

Consider the types of
awards given in the upcoming tax year

Interest deductions

Allowed business interest
deductions in the taxable year in which the interest is paid or accrued
(subject to various limitations)

– Limits deduction to 30%
of a business’s adjusted taxable income (ATI) for businesses with gross
receipts of $15million or more during the three preceding years

– Interest disallowed
would be carried forward indefinitely subject to special rules for certain
industries

Limits deduction to 30%
of a business’s adjusted taxable income (ATI) for businesses with gross
receipts of $25MIL or more

– Allow a five-year
carryover for disallowed interest

– Consider gradually
reducing debt if over the new limits for interest deductions

– Reconsider equity
offerings over any debt financing that would be undertaken before 12/31/2017

Pass-through businesses

Taxed at personal income
tax rates

– Allows a 23% temporary
deduction of qualified income subject to special rules

– Treats remaining
portion, subject to special rules, of income as compensation subject to
ordinary individual income tax rate

 

See Senate bill Sec. 11011, Deduction
for Qualified Business Income, for details on additional rules

– Caps rate at 25% after 2017,
9% on first $75K for certain small businesses, and effectively excludes
service businesses (i.e. legal, accounting, consulting, engineering, etc.)

– Treats remaining
portion, subject to special rules, of income as compensation subject to
ordinary individual income tax rate

 

See House bill Sec. 1004, Maximum Rate on Business Income of
Individuals, for details on additional rules

– Consider the deductions
and credits repeal or cutback, defer the recognition of business income to
2018, and accelerate deductions and credits into 2017

– Postpone considering a
switch to a C corp. to take advantage of the 20% rat vs. partnership or S
corp. until more info is available

Like-Kind Exchanges

Allowed taxpayers to
avoid paying taxes on trades of certain property provided the taxpayer
acquires similar property

Limits the exchanges, but
provides transition rule to allow exchanges if the taxpayer disposed or
acquired replacement property on or before 12/31/2017

Consistent with the
Senate’s bill

– Accelerate exchanges
before the end of the year to take advantage of Sect. 1031 exchanges

SOURCE: Wolters Kluwer News research and PKC Kuebler, APC research

 

(Information in this article as of December 11, 2017)


PKC Kuebler, APC is a full-service public accounting firm registered and licensed to practice as an accountancy corporation by the California Board of Accountancy. The information provided is intended for general tax and accounting needs. Articles are written for informational purposes only and should not be seen as any kind of advice. Content is accurate and true to the best of our knowledge, however, there may be omissions, errors or mistakes and it is advised you contact your CPA before taking any financial action. The opinions expressed in our articles do not reflect the opinions of any organizations in which we are affiliated with.

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