Choosing Between a Calendar Tax Year and a Fiscal Tax Year

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for some businesses, choosing a fiscal tax year can make more sense.

 

What’s a fiscal tax year?

A fiscal tax year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30. The year doesn’t necessarily need to end on the last day of a month. It might end on the same day each year, such as the last Friday in March. (This is known as a 52- or 53-week year.)

Flow-through entities (partnerships, S corporations and, typically, limited liability companies) using a fiscal tax year must file their returns by the 15th day of the third month following the close of their fiscal year. So, if their fiscal year ends on March 31, they need to file their returns by June 15. (Fiscal-year C corporations generally must file their returns by the 15th day of the fourth month following the fiscal year close.)

When does it make sense?

A key factor to consider is that, if you adopt a fiscal tax year, you must use the same period in maintaining your books and reporting income and expenses. For many seasonal businesses, a fiscal year can present a more accurate picture of the company’s performance.

For example, a snowplowing business might make the bulk of its revenue between November and March. Splitting the revenue between December and January to adhere to a calendar year end would make obtaining a solid picture of performance over a single season difficult.

In addition, if many businesses within your industry use a fiscal year end and you want to compare your performance to that of your peers, you’ll probably achieve a more accurate comparison if you’re using the same fiscal year.

Before deciding to change your fiscal year, be aware that the IRS requires businesses that don’t keep books and have no annual accounting period, as well as most sole proprietorships, to use a calendar year.

Does it matter?

If your company decides to change its tax year, you’ll need to obtain permission from the IRS. The change also will likely create a one-time “short tax year” — a tax year that’s less than 12 months. In this case, your income tax typically will be based on annualized income and expenses. But you might be able to use a relief procedure under Section 443(b)(2) of the Internal Revenue Code to reduce your tax bill.

Although choosing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. We can help you determine whether a calendar or fiscal year makes more sense for your business. Please contact us for specific questions and consultation.

Do you have your own wealth management plan?

Fingerprints: There are no two alike. So it should be with your wealth management plan. Taking a boilerplate approach could prevent you from achieving your specific goals. Here are some key points to consider when devising a plan that’s all your own.

 

Many variables

For your plan to be as unique as you, it should reflect variables such as:

·      Age,

·      Health status,

·      Risk tolerance, and

·      How you plan to use your assets now and going forward.

Risk tolerance is a particularly important point. Some people are naturally more willing to risk a loss for the opportunity of a larger gain. Others are uncomfortable with any possibility of loss even though this certainty may mean a lower potential return.

But risk tolerance also may be affected by age. If you’re retired or close to retirement, for example, a more conservative approach to investing, saving and spending is likely appropriate. By contrast, if you’re several decades away from retirement, you’ll more likely benefit from taking at least a few carefully considered chances to build wealth and keep ahead of inflation.

Withdrawal strategy

Another important component of a personal wealth management plan is your withdrawal strategy. For example, if you’re close to retirement, you need to withdraw from your accounts carefully to avoid having insufficient funds during retirement. Withdraw too little, however, and you could miss opportunities to enjoy life. (You also could face severe tax penalties if you don’t take required minimum distributions.)

Like your wealth management plan, your withdrawal strategy will be highly personal. The amount of income you’ll need in retirement will depend on your priorities. If you’re planning to travel extensively, your needs will be very different from what they’ll be if your primary goal is to stay close to home to spend more time with your family.

If you own assets in a variety of tax-free (such as a Roth IRA), tax-deferred (such as a 401(k) plan or traditional IRA) and taxable savings vehicles, there can be some significant tax implications to how you withdraw your assets. Conventional wisdom says that taxable assets should be withdrawn first, leaving your tax-advantaged holdings more time to grow. This approach may work in some situations, but it’s not necessarily the correct approach for everyone. (And minimum annual distributions are required from certain tax-advantaged accounts, generally after age 70½.)

Necessary help

Your wealth management plan should be carefully designed and maintained to suit the many distinctive elements of your life. But that doesn’t mean you must go about it alone. Please contact our firm for help not only creating a plan, but also checking in on it regularly to see whether any adjustments are necessary.

 

Sidebar: Don’t forget about estate planning

If your net worth is large enough that estate taxes are a concern, making annual gifts can be a surprisingly powerful way to reduce your taxable estate. In fact, making annual gifts can help you accomplish two important goals: removing assets from your estate and passing along assets to loved ones. Current federal law allows annual tax-free gifts of $15,000 per recipient per year ($30,000 for married couples).

Just make sure your gifting strategy is well integrated into your overall estate plan. Such a plan might also involve trusts and other mechanisms for distributing your wealth.

Getting to Know Your Credit & Debit Cards a Bit Better

Virtually everyone has a credit and debit card these days. But many of us still live in fear of these plastic necessities because we’re not terribly familiar with the fine print of the arrangements under which they operate. Let’s get to know them a bit better.

Credit Cards

If your credit card is used without your permission, you may be responsible for up to $50 in charges, according to the Federal Trade Commission (FTC). If your card is lost or stolen and you report the loss before your card is used in a fraudulent transaction, you can’t be held responsible for any unauthorized charges. Some card issuers protect customers regardless of when — or if — they notify the card company.

When reporting a card loss or fraudulent transaction, contact the card company via phone; many provide toll-free numbers that are answered around the clock. In addition, the FTC advises following up via a letter or email. It should include your account number, the date you noticed the card was missing (if applicable), and the date you initially reported the card loss or fraudulent transaction.

Debit Dangers

Debit card liability can be a little riskier. It generally depends on whether the card was lost or stolen or is still in your possession, the type of transaction, and when you reported the loss or unauthorized transaction.

According to the FTC, if you report a missing debit card before any unauthorized transactions are made, you aren’t responsible for the unauthorized transactions. If you report a card loss within two business days after you learn of the loss, your maximum liability for unauthorized transactions is $50.

If you report the card loss after that time but within 60 calendar days of the date your statement showing an unauthorized transaction was mailed, liability can jump to $500. Finally, if you report the card loss more than 60 calendar days after your statement showing unauthorized transactions was mailed, you could be liable for all the funds taken from your account.

If you notice an unauthorized debit card transaction on your statement, but your card is in your possession, you have 60 calendar days after the statement showing the unauthorized transaction is mailed to report it and still avoid liability.

While the lower protections required on debit cards may make you wonder whether you’re safer using a credit card, some debit card companies offer protections that go above what the law requires. Check with your provider.

Risk Management Steps

Taking a few simple steps can help cut the risk that you’ll be held liable for unauthorized use of your credit or debit card. First, carry only cards you need and destroy old ones, shredding them if possible. Don’t provide your card number over the phone or online unless you’ve initiated the contact.

In addition, choose a PIN that’s not easily guessed and make sure to memorize it. If you have online access, take a few moments to scan transactions every time you log on or at least once a week. If you still use paper statements, be sure to review them when they arrive in the mail. If you notice a transaction that isn’t yours, report it to your credit card issuer or bank right away.

Finally, keep a list of important numbers and relevant data stored separately from the cards themselves. Having this information handy will make it easier to report a missing card or suspicious transaction quickly.

Ins and Outs

Many of us have grown so familiar with our credit and debit cards that we take them for granted. But keep in touch with their ins and outs. We can answer any further questions you may have.

Copyright © 2018

Upcoming Tax Deadlines

April 17 — Besides being the last day to file (or extend) your 2017 personal return and pay any tax that is due, 2018 first quarter estimated tax payments for individuals, trusts and calendar-year corporations are due today. Also due are 2017 returns for trusts, calendar-year estates and C corporations, FinCEN Form 114 (Report of Foreign Bank and Financial Accounts [but an automatic extension applies to October 15]), and any final contribution you plan to make to an IRA or Education Savings Account for 2017. In addition, Simplified Employee Pension and Keogh contributions are due today if your return isn’t being extended.

June 15 — Second quarter estimated tax payments for individuals, trusts and calendar-year corporations are due today.

Copyright © 2018

 

 

 

 

 

 

 

 

 

The New Deal on Employee Meals (And Entertainment)

Years and years ago, the notion of having a company cafeteria or regularly catered meals was generally feasible for only the biggest of businesses. But, more recently, employers providing meals to employees has become somewhat common for many midsize to large companies. A recent tax law change, however, may curtail the practice.

As you’re likely aware, in late December 2017 Congress passed and the President signed the Tax Cuts and Jobs Act. The law will phase in a wide variety of changes to the way businesses calculate their tax liabilities — some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall in the latter category.

Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be completely nondeductible.

If your business regularly provides meals to employees, let us assist you in anticipating the changing tax impact.

Copyright © 2018

What is “Reasonable Compensation”

The issue of reasonable owners’ compensation often comes up in federal tax inquiries. But it may also be an issue in shareholder disputes and divorce cases.

For instance, minority shareholders or spouses of controlling shareholders may claim that an owner is taking an excessive salary, thereby impairing the value of the business. Alternatively, a nonowner-spouse may claim that a salary is too low, because the owner-spouse is trying to minimize the base on which alimony and child support payments will be calculated.

If you find yourself embroiled in these situations or under fire from the IRS, a financial expert can help you support — or defend against — these claims.

Factors to Consider

What’s considered reasonable in shareholder disputes or divorces may vary based on state law or legal precedent. A reasonable compensation assessment generally starts by looking outside the company at external market conditions and geographic location. Then, the analysis turns to internal factors, such as the company’s size, financial performance and compensation programs. Finally, the individual’s contributions to the company, including his or her responsibilities, skills, reputation and experience, are factored into the analysis, along with any personal guarantees from the owner.

An owner may sometimes warrant a salary that’s higher or lower than what nonowner-employees receive for similar positions. For example, the U.S. Tax Court recently upheld a combined annual salary of more than $7.3 million for two owners of a large Arizona concrete contractor. That may seem like a lot of money, but the court ruled that the company’s investors still received a reasonable return on investment after owners’ salaries were paid. This type of analysis is known as the independent investor test.

Compensation Resources

Another type of analysis hinges on comparable salaries paid in arm’s length compensation arrangements. Reliable compensation data for a particular industry or geographic market can be found in several public and private salary surveys. A few common examples include Willis Towers Watson’s executive salary surveys, the Risk Management Association’s Annual Statement Studies® and MicroBilt’s Integra industry reports. An expert may also consult Economic Research Institute’s quarterly salary surveys, the Conference Board’s annual executive compensation reports and Dun & Bradstreet’s Key Business Ratios on the Web.

Additional industry- or location-specific data can be obtained from salary surveys that break down the data by industry, market or size; industry trade associations and publications; and executive headhunters.

Outside Expertise

Deciding what’s reasonable for a business owner to receive as compensation can be subjective and sensitive. Our firm can serve as an expert or work with yours to research comparable market data and use it to come up with a defensible estimate.

Copyright © 2018

No Kidding: Child Credit to Get Even More Valuable

The child credit has long been a valuable tax break. But, with the passage of the Tax Cuts and Jobs Act (TCJA) late last year, it’s now even better — at least for a while. Here are some details that every family should know.

Amount and Limitations

For the 2017 tax year, the child credit may help reduce federal income tax liability dollar-for-dollar by up to $1,000 for each qualifying child under age 17. So if you haven’t yet filed your personal return or you might consider amending it, bear this in mind.

The credit is, however, subject to income limitations that may reduce or even eliminate eligibility for it depending on your filing status and modified adjusted gross income (MAGI). For 2017, the limits are $110,000 for married couples filing jointly, and $55,000 for married taxpayers filing separately. (Singles, heads of households, and qualifying widows and widowers are limited to $75,000 in MAGI.)

Exciting Changes

Now the good news: Under the TCJA, the credit will double to $2,000 per child under age 17 starting in 2018. The maximum amount refundable (because a taxpayer’s credits exceed his or her tax liability) will be limited to $1,400 per child.

The TCJA also makes the child credit available to more families than in the past. That’s because, beginning in 2018, the credit won’t begin to phase out until MAGI exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseouts of $110,000 and $75,000. The phaseout thresholds won’t be indexed for inflation, though, meaning the credit will lose value over time.

In addition, the TCJA includes (starting in 2018) a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child, parent, sibling, niece or nephew, or aunt or uncle). Importantly, these provisions expire after 2025.

Qualifications to Consider

Along with the income limitations, there are other qualification requirements for claiming the child credit. As you might have noticed, a qualifying child must be under the age of 17 at the end of the tax year in question. But the child also must be a U.S. citizen, national or resident alien, and a dependent claimed on the parents’ federal tax return who’s their own legal son, daughter, stepchild, foster child or adoptee. (A qualifying child may also include a grandchild, niece or nephew.)

As a child gets older, other circumstances may affect a family’s ability to claim the credit. For instance, the child needs to have lived with his or her parents for more than half of the tax year.

Powerful Tool

Tax credits can serve as powerful tools to help you manage your tax liability. So if you may qualify for the child credit in 2017, or in years ahead, please contact our firm to discuss the full details of how to go about claiming it properly.

Copyright © 2018

Tax Bill Photo

House Tax Bill Released

On November 2, 2017, the House of Representatives released a draft tax reform bill titled the “Tax Cuts and Jobs Act.”  The bill would reduce individual and business tax rates, would modify or eliminate a variety of itemized deductions as well as repeal the estate and alternative minimum taxes, and would change the taxation of foreign income.  The Ways & Means Committee intends to formally markup the bill the week of November 6 with full House floor consideration planned before Thanksgiving.  Most of the provisions would be effective starting in 2018.

Details

Under the House bill, individuals would be subject to four tax brackets at 12, 25, 35, and 39.6 percent.  The 39.6 rate would apply at $1 million for married taxpayers filing jointly and $500,000 for other filers.  The standard deduction would be increased, from $6,350 to $12,200 for single filers and from $12,700 to $24,400 for married taxpayers filing jointly.  Personal exemptions would be repealed; however, the child tax credit would be expanded.

Itemized deductions would be changed significantly by the bill.  Deductions for state and local income and sales taxes would be eliminated for individuals, and the deduction for local property taxes paid would be capped at $10,000.  Mortgage interest expense deductions would be limited to acquisition indebtedness on the taxpayer’s principal residence of up to $500,000 for new mortgage indebtedness, reduced from the current limit of $1 million (existing mortgages would be grandfathered).  Home equity indebtedness would no longer be deductible. Cash contributions to public charities would be limited to 60 percent of the donor’s adjusted gross income, an increase from 50 percent adjusted gross income limitation under current law.  Deductions for tax preparation fees, medical expenses, moving expenses, and personal casualty losses would be repealed, but the deduction for personal casualty losses would remain for relief provided under special disaster relief legislation. The overall limitation on itemized deductions would also be removed.  The individual alternative minimum tax (AMT) would be repealed. Transition provisions would ensure taxpayers with AMT carryforwards would be able to use the remaining credits between 2018 and 2022.

Notably, most of the reform provisions are effective beginning after 2017; however, the changes to the mortgage interest expense deduction are effective for debt incurred on or after November 2, 2017.

The exclusion of gain from the sale of a principal residence would be phased out for married taxpayers with an adjusted gross income in excess of $500,000 ($250,000 for single filers) but the act changes the use requirements and calls for taxpayers to live in the residence for five of the previous eight years to qualify, up from the current requirement to use the residence for two of the previous five years. The bill further repeals the deduction for alimony payments effective for any divorce decree or separation agreement executed after 2017.

Estate, gift, and generation-skipping transfer (GST) tax exclusions for individuals would be increased to $10 million (as of 2011) and then adjusted for inflation, and the estate and GST taxes would then be repealed after 2023 but would maintain the step-up in basis provisions. Beginning in 2024, the top gift tax rate would be lowered to 35 percent with a lifetime exemption of $10 million and an annual exclusion of $14,000 (as of 2017) indexed for inflation.

Impacting businesses, the corporate tax rate would be reduced from 35 percent to 20 percent, and certain “business income” from pass-through entities would be taxed at 25 percent instead of an owner’s individual rate.  Bonus depreciation of 100 percent would be available for qualifying property placed in service before January 1, 2023, new property types would qualify for bonus depreciation and expense amounts would be expanded.  The bill proposes to eliminate the Domestic Production Activities Deduction and change other aspects of entertainment expenses, net operating losses, like-kind exchanges, business credits, and small-business accounting methods, among other provisions.  The bill would also repeal the corporate alternative minimum tax (AMT) and make existing AMT credit carryforwards refundable over a period of five years.

Taxation of a corporation’s foreign income would change from a worldwide system to an exemption system, with a 100-percent exemption from U.S. tax for the foreign source portion of dividends paid by a foreign subsidiary to U.S. corporate shareholders that own 10 percent or more of the foreign subsidiary.  To transition to the exemption system, the bill also includes a transition tax for untaxed foreign earnings accumulated under the current worldwide taxing system. The House bill also includes provisions to prevent base erosion. A separate tax alert discussing in more detail the House bill’s proposals relating to the taxation of foreign income and foreign persons is forthcoming.

The bill would impact tax-exempt entities as well through the expanded application of unrelated business income tax (UBIT) rules and a flat 1.4 percent tax of the net investment income of entities including private foundations.
Insights

The release of the House bill represents the first significant and detailed legislative step toward tax reform under the Trump Administration.  As drafted, most of the provisions would be effective for the 2018 tax year.  The House Ways & Means Committee is expected to formally markup the legislation the week of November 6, with full House consideration planned before Thanksgiving.

There are additional provisions in the proposed legislation effecting education credits, retirement accounts, deferred compensation, and private foundations, among others.

Jobs photo

Tax Cuts and Jobs Act Summary

Individual Highlights

Unless otherwise noted, the changes are effective for tax years beginning in 2018 through 2025.

  • Tax rates. The new law imposes a new tax rate structure with seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The top rate was reduced from 39.6% to 37% and applies to taxable income above $500,000 for single taxpayers, and $600,000 for married couples filing jointly. The rates applicable to net capital gains and qualified dividends were not changed. The “kiddie tax” rules were simplified. The net unearned income of a child subject to the rules will be taxed at the capital gain and ordinary income rates that apply to trusts and estates. Thus, the child’s tax is unaffected by the parent’s tax situation or the unearned income of any siblings.
  • Standard deduction. The new law increases the standard deduction to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for singles and married taxpayers filing separately. Given these increases, many taxpayers will no longer be itemizing deductions. These figures will be indexed for inflation after 2018.
  • Exemptions. The new law suspends the deduction for personal exemptions. Thus, starting in 2018, taxpayers can no longer claim personal or dependency exemptions. The rules for withholding income tax on wages will be adjusted to reflect this change, but IRS was given the discretion to leave the withholding unchanged for 2018.
  • New deduction for “qualified business income.“ Starting in 2018, taxpayers are allowed a deduction equal to 20 percent of “qualified business income,” otherwise known as “pass-through” income, i.e., income from partnerships, S corporations, LLCs, and sole proprietorships. The income must be from a trade or business within the U.S. Investment income does not qualify, nor do amounts received from an S corporation as reasonable compensation or from a partnership as a guaranteed payment for services provided to the trade or business. The deduction is not used in computing adjusted gross income, just taxable income. 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 depreciable tangible property used in the business is phased in, and (2) income from the following trades or businesses is phased out of qualified business income: 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.
  • Child and family tax credit. The new law increases the credit for qualifying children (i.e., children under 17) to $2,000 from $1,000, and increases to $1,400 the refundable portion of the credit. It also introduces a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children. The adjusted gross income level at which the credits begin to be phased out has been increased to $200,000 ($400,000 for joint filers).
  • State and local taxes. The itemized deduction for state and local income and property taxes is limited to a total of $10,000 starting in 2018.
  • Mortgage interest. Under the new law, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
  • Miscellaneous itemized deductions. There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income. This category included items such as tax preparation costs, investment expenses, union dues, and unreimbursed employee expenses.
  • Medical expenses. Under the new law, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers. Previously, the AGI “floor” was 10% for most taxpayers.
  • Casualty and theft losses. The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
  • Overall limitation on itemized deductions. The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds. The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
  • Moving expenses. The deduction for job-related moving expenses has been eliminated, except for certain military personnel. The exclusion for moving expense reimbursements has also been suspended.
  • Alimony. For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
  • Health care “individual mandate.” Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
  • Estate and gift tax exemption. Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples). The gift allowance for 2018 has been increased to $15,000 from $14,000.
  • Alternative minimum tax (AMT) exemption. The AMT has been retained for individuals by the new law but the exemption has been increased to $109,400 for joint filers ($54,700 for married taxpayers filing separately), and $70,300 for unmarried taxpayers. The exemption is phased out for taxpayers with alternative minimum taxable income over $1 million for joint filers, and over $500,000 for all others.
  • 529 plan distributions. 529 plan distributions are tax-free if used to pay “qualified higher education expenses” of the beneficiary (student). Before the TCJA made these changes, tuition for elementary or secondary schools wasn’t a “qualified higher education expense,” so students/529 beneficiaries who had to pay it couldn’t receive tax-free 529 plan distributions. The TCJA provides that qualified higher education expenses now include expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Thus, tax-free distributions from 529 plans can now be received by beneficiaries who pay these expenses, effective for distributions from 529 plans after 2017.There is a limit to how much of a distribution can be taken from a 529 plan for these expenses. The amount of cash distributions from all 529 plans per single beneficiary during any tax year can’t, when combined, include more than $10,000 for elementary school and secondary school tuition incurred during the tax year. NOTE – Illinois has indicated that 529 plan distributions made to pay elementary or secondary education expenses would be taxable distributions to the extent that a deduction was previously taken for those contributions.

Business Highlights

Unless otherwise noted, the changes are effective for tax years beginning in 2018.

  • Corporate tax rates reduced. One of the more significant new law provisions cuts the corporate tax rate to a flat 21%. Before the new law, rates were graduated, starting at 15% for taxable income up to $50,000, with rates at 25% for income between 50,001 and $75,000, 34% for income between $75,001 and $10 million, and 35% for income above $10 million.
  • Alternative minimum tax repealed for corporations. The corporate alternative minimum tax (AMT) has been repealed by the new law.
  • Alternative minimum tax credit. Corporations are allowed to offset their regular tax liability by the AMT credit. For tax years beginning after 2017 and before 2022, the credit is refundable in an amount equal to 50% (100% for years beginning in 2021) of the excess of the AMT credit for the year over the amount of the credit allowable for the year against regular tax liability. Thus, the full amount of the credit will be allowed in tax years beginning before 2022.
  • Net Operating Loss (“NOL”) deduction modified. Under the new law, generally, NOLs arising in tax years ending after 2017 can only be carried forward, not back. The general two-year carryback rule, and other special carryback provisions, have been repealed. However, a two-year carryback for certain farming losses is allowed. These NOLs can be carried forward indefinitely, rather than expiring after 20 years. Additionally, under the new law, for losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income, determined without regard to the deduction. Carryovers to other years are adjusted to take account of the 80% limitation.
  • Limit on business interest deduction. Under the new law, every business, regardless of its form, is limited to a deduction for business interest equal to 30% of its adjusted taxable income. For pass-through entities such as partnerships and S corporations, the determination is made at the entity, i.e., partnership or S corporation, level. Adjusted taxable income is computed without regard to the repealed domestic production activities deduction and, for tax years beginning after 2017 and before 2022, without regard to deductions for depreciation, amortization, or depletion. Any business interest disallowed under this rule is carried into the following year, and, generally, may be carried forward indefinitely. The limitation does not apply to taxpayers (other than tax shelters) with average annual gross receipts of $25 million or less for the three-year period ending with the prior tax year. Real property trades or businesses can elect to have the rule not apply if they elect to use the alternative depreciation system for real property used in their trade or business. Certain additional rules apply to partnerships.
  • Domestic production activities deduction (“DPAD”) repealed. The new law repeals the DPAD for tax years beginning after 2017. The DPAD formerly allowed taxpayers to deduct 9% (6% for certain oil and gas activities) of the lesser of the taxpayer’s (1) qualified production activities income (“QPAI”) or (2) taxable income for the year, limited to 50% of the W-2 wages paid by the taxpayer for the year. QPAI was the taxpayer’s receipts, minus expenses allocable to the receipts, from property manufactured, produced, grown, or extracted within the U.S.; qualified film productions; production of electricity, natural gas, or potable water; construction activities performed in the U.S.; and certain engineering or architectural services.
  • New fringe benefit rules. The new law eliminates the 50% deduction for business-related entertainment expenses. The pre-Act 50% limit on deductible business meals is expanded to cover meals provided via an in-house cafeteria or otherwise on the employer’s premises. Additionally, the deduction for transportation fringe benefits (e.g., parking and mass transit) is denied to employers, but the exclusion from income for such benefits for employees continues. However, bicycle commuting reimbursements are deductible by the employer but not excludable by the employee. Last, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees except as provided for the employee’s safety.
  • Increased Code Sec. 179 Expensing. The new law increases the maximum amount that may be expensed under Code Sec. 179 to $1 million. If more than $2.5 million of property is placed in service during the year, the $1 million limitation is reduced by the excess over $2.5 million. Both the $1 million and the $2.5 million amounts are indexed for inflation after 2018. The expense election has also been expanded to cover (1) certain depreciable tangible personal property used mostly to furnish lodging or in connection with furnishing lodging, and (2) the following improvements to nonresidential real property made after it was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; security systems; and any other building improvements that aren’t elevators or escalators, don’t enlarge the building, and aren’t attributable to internal structural framework.
  • Bonus depreciation. Under the new law, a 100% first-year deduction is allowed for qualified new and used property acquired and placed in service after September 27, 2017 and before 2023. Pre-Act law provided for a 50% allowance, to be phased down for property placed in service after 2017. Under the new law, the 100% allowance is phased down starting after 2023.
  • Depreciation of qualified improvement property. The new law provides that qualified improvement property is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was placed in service. It does not include expenses related to the enlargement of the building, any elevator or escalator, or the internal structural framework. There are no longer separate requirements for leasehold improvement property or restaurant property.
  • Depreciation of farming equipment and machinery. Under the new law, subject to certain exceptions, the cost recovery period for farming equipment and machinery the original use of which begins with the taxpayer is reduced from 7 to 5 years. Additionally, in general, the 200% declining balance method may be used in place of the 150% declining balance method that was required under pre-Act law.
  • Like-kind exchange treatment limited. Under the new law, the rule allowing the deferral of gain on like-kind exchanges of property held for productive use in a taxpayer’s trade or business or for investment purposes is limited to cover only like-kind exchanges of real property not held primarily for sale. Under a transition rule, the pre-TCJA law applies to exchanges of personal property if the taxpayer has either disposed of the property given up or obtained the replacement property before 2018.
  • Availability of the cash method of accounting. Under pre-Act law, C corporations and certain other taxpayers were prohibited from using the overall cash method of accounting.  Those restrictions have been narrowed under the new law.  For tax years beginning after 2017, taxpayers may generally use the overall cash method of accounting if a gross receipts test is met.  That test requires a taxpayer’s gross receipts for the 3-prior tax years to average $25 million or less.  This provides qualifying taxpayers the opportunity to possibly defer income.
  • Availability of the completed contract method for contractors. Under pre-Act law, contractors did not qualify for the completed contract method if their average annual gross receipts for the 3-prior tax years exceeded $10 million.  Under the new law, that restriction has been raised so that it now only applies to taxpayers whose 3-year average annual gross receipts exceeded $25 million.  This provides qualifying taxpayers the opportunity to defer income.
  • Capitalization of inventory costs. Under pre-Act law, only small producers and resellers (3-year average gross receipts under $10 million) were exempt from the requirement to capitalize certain costs into inventory.  This had the effect of delaying deductions for a taxpayer.  The new law expands that exception to provide that small producers and resellers are defined as those whose 3-year average annual gross receipts exceeded $25 million.  This provides qualifying taxpayers the opportunity to accelerate expenses when compared to the old capitalization rules.
Scheffel Boyle Blog 1

Making 2017 Retirement Plan Contributions in 2018

Personal tax exemptions and the standard deduction have looked largely the same for quite some time. But, in light of the Tax Cuts and Jobs Act (TCJA) passed late last year, many individual taxpayers may find themselves confused by the changing face of these tax-planning elements. Here are some clarifications.
For 2017, taxpayers can claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. If they choose not to itemize, they can take a standard deduction based on their filing status: $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.
For 2018 through 2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction amounts to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. The standard deduction amounts will be adjusted for inflation beginning in 2019.
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from family tax credits.