The Deep Dive: New Favorable Depreciation Provisions

Liz BelcherBy Liz Belcher, CPA
Manager, Tax Services

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax law and how they might affect you or your business. 

The Tax Cuts and Jobs Act (TCJA) has made a number of favorable changes in the availability of expensing allowances for depreciable property. These include increasing the IRC Section 179 expensing limit; expanding bonus depreciation to include both new and used property; and allowing for 100% write off for the year the qualified property is placed in service.

More Favorable Bonus Depreciation Provisions

Under prior law, taxpayers were able to claim a 50% first-year bonus depreciation deduction for qualified new assets. In addition, used property did not previously qualify for bonus depreciation.

Under TCJA, bonus depreciation has been significantly improved. For qualified property placed in service after September 27, 2017 and before January 1, 2023, the first-year bonus depreciation percentage is increased to 100%. In addition, the 100% deduction is allowed for both new and used qualifying property. In later years, the bonus depreciation is scheduled to be reduced as follows:

  • 80% for property placed in service in 2023;
  • 60% for property placed in service in 2024;
  • 40% for property placed in service in 2025;
  • 20% for property placed in service in 2026;

Enhancement of Section 179 Deduction

When 100% bonus depreciation is not available, the Section 179 deduction can provide similar benefits. Permitted expensing, which allows a taxpayer to immediately deduct the cost of qualifying property, is increased to a maximum deduction of $1 million for property placed in service after 2017, and the phase-out threshold is increased to $2.5 million. For later tax years, both the $1 million and the $2.5 million amounts will be indexed for inflation.

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.

Depreciation of Qualified Improvement Property

Under the new law, “qualified improvement property” is depreciable using a 15-year recovery period and the straight-line method. Qualified improvement property is defined as any improvement to an interior portion of a building that is nonresidential real property placed in service after the building was first placed in service, except for any improvement for which the expenditure is attributable to (1) the enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building.

The new law also eliminates the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that were in place under prior law. Most significantly, the newly defined class is eligible for both bonus depreciation and Section 179 expensing.

If you have any questions about tax reform changes, please call Liz Belcher at (317) 613-7846 or email lbelcher@sponselcpagroup.com.

Click here for detailed article on the “Pass-Through Income Deduction”

Click here for detailed article on “Changes to Fringe Benefit Rules for Employers”

Click here for summary of “Key Provisions Affecting Individual Taxpayers”

Click here for summary of “Key Provisions Affecting Business Taxpayers”

The Deep Dive: Changes to Fringe Benefit Rules for Employers

Brandon CanganyBrandon Cangany, CPA
Senior, Tax Services
bcangany@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax reform and how they might affect you or your business.  Click here for last week’s column.

Business Deduction is Denied for Entertainment Expenses – The Tax Cuts and Jobs Act eliminates the 50% deduction for business-related entertainment expenses for amounts paid or incurred after December 31, 2017. Under the new law, no deduction is allowed for: (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues for any club organized for business, pleasure, recreation or other social purposes, or (3) a facility used in connection with any of the above items.

However, the restrictions on deducting entertainment expenses don’t apply to nine types of expenses listed in Code Sec. 274(e), including the following:

  • Expenses for goods, services and facilities that are treated as compensation to an employee on the employer’s income tax return and as wages of the employee for withholding purposes.
  • Expenses paid or incurred by the taxpayer, in connection with the performance of services for another person, under a reimbursement or other expense allowance arrangement, if the taxpayer accounts for the expenses to that person.
  • Expenses for recreational, social or similar activities (including related facilities) primarily for the benefit of the taxpayer’s employees, other than highly-compensated employees.

As a result of the tax law change, Sponsel CPA Group recommends that taxpayers set up an “entertainment” account (separate from their meals account) within their general ledger in order to capture the now non-deductible entertainment expenses.

Business Deduction is Limited for Employer Provided Meals – The new law provides that the 50% limit on the deductibility of business meals is expanded, for amounts paid or incurred after December 31, 2017, to meals provided through an in-house cafeteria or otherwise on the premises of the employer. Under prior law, these expenses were 100% deductible by the taxpayer. For tax years beginning after December 31, 2025, the new law will disallow an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility.

Business Deduction is Denied for the Cost of Providing Qualified Transportation Benefits – The new law provides that no deduction is allowed, for amounts paid or incurred after December 31, 2017, for the expense of a qualified transportation fringe benefit (e.g., parking and mass transit), but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.

If you have any questions about tax reform changes, please call Brandon Cangany at (317) 613-7899 or email bcangany@sponselcpagroup.com.

Tax Form Highlight Sheets Available for Download

By Nick Hopkins, CPA, CFP®
Partner, Director of Tax Services

 

Sponsel CPA Group has developed two highlight sheets which provide a helpful recap of some of the most significant tax reform changes. It’s part of our ongoing effort to bring as much clarity as possible to our valued clients about the most significant changes to the tax code in three decades.

 

We have one version addressing individual taxpayers and another one for business taxpayers. Click on the thumbnail images below to view or download them in PDF form.

 

Individual Taxpayers:

 

Business Taxpayers:

 

 

 

 

 

 

 

 

 

 

If you have any questions about the new tax outlook, please call Nick Hopkins at (317) 608-6695 or email nhopkins@sponselcpagroup.com.

The Deep Dive: Pass-Through Income Deduction

Nick HopkinsBy Nick Hopkins, CPA, CFP®
Partner, Director of Tax Services
nhopkins@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax reform and how they might affect you or your business.

The Tax Cuts and Jobs Act introduced a new tax deduction taking effect for tax years beginning after December 31, 2017 and before January 1, 2026 that should provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC or sole proprietorship. This income is commonly referred to as “pass-through” income.

The deduction is 20% of a taxpayer’s combined “qualified business income (QBI)” from a partnership, S corporation or sole proprietorship, which is defined as the net amount of items of income, gain, deduction and loss with respect to a taxpayer’s trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business).

The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.

The deduction is taken “below the line,” i.e., it reduces a taxpayer’s taxable income but not their adjusted gross income. In general, the deduction cannot exceed 20% of the excess of a taxpayer’s taxable income over net capital gain. If the net amount of qualified income, gain, deduction and loss relating to qualified trade or businesses of the taxpayer for any tax year is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year.

Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.

For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from “specified service” trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of 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.

Here’s how the phase-in works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), all of the net income from the specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) If your taxable income is between $157,500 and $207,500, you would exclude only that percentage of income derived from a fraction the numerator of which is the excess of taxable income over $157,500 and the denominator of which is $50,000.

So, for example, if taxable income is $167,500 ($10,000 above $157,500), only 20% of the specified service income would be excluded from QBI ($10,000/$50,000). (For joint filers, the same operation would apply using the $315,000 threshold, with a $100,000 phase-out range.)

Additionally, for taxpayers with taxable income more than the thresholds listed above, a limitation on the amount of the deduction is phased in based either on wages paid or wages paid plus a capital element.

Here’s how it works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), your deduction for QBI cannot exceed the greater of (A) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (B) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate).

So, if your QBI were $100,000, leading to a deduction of $20,000 (20% of $100,000), but the greater of (A) or (B) above were only $16,000, your deduction would be limited to $16,000, i.e., it would be reduced by $4,000. And if your taxable income were between $157,500 and $207,500, you would only incur a percentage of the $4,000 reduction, with the percentage worked out via the fraction discussed in the preceding paragraph.

(For joint filers, the same operations would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends or income from publicly traded partnerships.

This material is adapted from Thomson Reuters/Tax & Accounting and is used with permission.

If you have any questions about tax reform changes, please call Nick Hopkins at (317) 608-6695 or email nhopkins@sponselcpagroup.com.

 

Deductability of Prepaid Real Estate Taxes Under New Law

Nick HopkinsBy Nick Hopkins, CPA, CFP®
Partner, Director of Tax Services

Under the recently passed tax law, individual taxpayers are limited to a maximum of $10,000 for the amount of combined state and local income tax, property tax and sales tax (if elected) claimed as an itemized deduction for tax years beginning after December 31, 2017.

As a result of these changes, many taxpayers have asked if they can prepay their 2018 real estate property taxes before December 31, 2017, in order to claim the amount as an itemized deduction on their 2017 federal individual income tax return.

In response, yesterday the IRS has issued an advisory: click here to read it.

In general, the IRS states that a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 if the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018. A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.

Please be aware of one important caveat: Individual taxpayers who will pay alternative minimum tax (AMT) on their 2017 federal individual income tax return will most likely receive no benefit by prepaying their 2018 real estate taxes in 2017.

If you have any questions about real estate deductions, please call Nick Hopkins at (317) 608-6695 or email nhopkins@sponselcpagroup.com.

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