Year-end tax planning

As year-end approaches and in light of the major tax legislation passed at the end of 2017, it is helpful to be reminded of pertinent business/corporate tax planning matters that are new this calendar year.

Section 199A
This new tax code section has received a lot of attention and for good reason. For tax years beginning after 2017, all pass-through entity owners (not C corporations) may be entitled to a deduction of up to 20 percent of their qualified business income. There are some thresholds, phase-outs and limits particularly on service businesses such as lawyers, accountants and consultants. There may be some planning that allows a business to qualify for this significant 20 percent deduction. For example, it may be possible to defer income or accelerate deductions to get under the dollar thresholds (or be subject to a smaller phase-out of the deduction) for 2018. The available deduction may also be enhanced by paying additional W-2 wages before year-end. The rules are complex so it’s best to consult a tax advisor.

Section 168(k)
First year bonus depreciation is not new but the bonus increased from 50 percent to 100 percent so businesses can claim a 100 percent bonus first year depreciation deduction for machinery and equipment that was bought used (with some exceptions) or new, if purchased and placed in service this year. As with Section 179, discussed in detail below, the deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, qualifying property bought and placed in service in December 2018 qualifies for a full deduction. Unlike Section 179, there are no income limitations on bonus depreciation.

Section 179
This section is also not new but the expensing limits have increased for 2018 and all businesses should consider taking advantage of these increases. Beginning in 2018, and subject to income limitations, the expensing limit is $1 million and the investment ceiling limit is $2.5 million. Expensing is generally available for most depreciable property (other than commercial buildings) and off-the-shelf computer software. New this year, expensing is available for qualified property improvement for roofs, HVAC, fire protection, and alarm and security systems. Generally, any improvement to a building’s interior is allowed, but not for the enlargement of a building or its internal structural framework, or the addition of an elevator or escalators. Note that bonus depreciation is not allowed for such property.

These increased caps and limits, coupled with expanded scope of qualifying property, means that many small- and medium-sized businesses with timely purchases will be able to deduct most, if not all, of their outlays for machinery and equipment. This deduction is not prorated based on the timing of the purchase. Businesses receive the full deduction whether purchased and placed in service for 364 days or just one day of this year.

State and local tax deductions
There has been a lot of press and media coverage about the $10,000 cap on state and local tax deductions which will impact a lot of taxpayers. Importantly, this cap applies to individual income tax returns only. For businesses, state and local taxes continue to be fully deductible and not subject to that cap.

Section 163(j)
This new section limits the deductibility of interest expense. For businesses with gross income over $25 million, interest expense is now only deductible up to 30 percent of adjusted taxable income (there are specific rules for defining adjusted taxable income and after January 1, 2022, definition becomes less taxpayer friendly). Leveraged investment transactions need to be reviewed as the tax benefits are less favorable.

This list is by no means exhaustive; therefore, it’s best to consult your advisors to make sure your business takes advantage of available tax planning opportunities before year-end. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Mitchell D. Weinstein, Principal and President