Posts Tagged ‘Sponsel CPA Group’

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.

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.

Tax Reform: What It Means for You

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

Now that the debate is over and the votes have been taken, tax reform is the new reality. President Trump is expected to sign the “Tax Cuts and Jobs Act” in the coming days, bringing the most sweeping changes to the U.S. tax code in three decades.

The Act in its entirety is a whopping 1,097 pages long, which will take some time to digest all of the details of the bill. However, below is a summary of some of the key changes for both individual taxpayers and business owners.

FOR INDIVIDUAL TAXPAYERS:

  • Tax Rates — There will now be 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.
  • Standard Deduction — The standard deduction is increased to $24,000 for joint filers, $18,000 for head of household and $12,000 for singles or married taxpayers filing separately. The expected result is fewer people will be itemizing deductions.
  • Exemptions — Starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
  • Child and Family Tax Credit — The child and family tax credit doubles to $2,000, and increases the refundable portion to $1,400. This means that some lower-income families could receive a refund check even if they pay no federal income tax.
  • State and Local Taxes — State and local income and property tax itemized deductions are limited to a total of $10,000.
  • Mortgage InterestMortgage interest on a principle or second home is deductible up to $750,000, down from $1 million starting with loans taken out in 2018. Home Equity Loan (HELOC) interest is no longer deductible after December 31, 2017, no matter 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 included such deductions as tax preparation costs, investment expenses, union dues and unreimbursed employee expenses.
  • Medical Expenses — Medical expenses are deductible after they exceed 7.5% of adjusted income (down from 10%) for 2017 and 2018.
  • Health Care “Individual Mandate — The Affordable Care Act (“Obamacare”) tax penalty for people who fail to purchase minimum essential health coverage is abolished starting in 2019.
  • Estate and Gift Tax Exemption — The estate and gift tax exemption is increased to $11.2 million ($22.4 million for married couples).
  • Alimony — Alimony payments are no longer deductible by the payer, nor includable by the recipient for divorce decrees issued after December 31, 2018.
  • Individual Alternative Minimum Tax (AMT) Exemption — The individual Alternative Minimum Tax is retained, but the exemption increased to $109,400 for joint filers, $54,700 for married couples filing separately and $70,300 for singles. It is phased out for taxpayers with income above $1 million for joint filers, $500,000 for everyone else.

FOR BUSINESSES:

  • Pass-Through Deduction — The Act establishes a 20 percent deduction of qualified business income from certain pass-through businesses (i.e. partnerships, S-Corporations, LLC’s, or sole proprietorships). Specific services, such as health, law and professional services, are generally excluded. However, joint filers with taxable income below $315,000 (deduction phased-out fully at $415,000) and other files with taxable income below $157,500 (deduction phased-out fully at $207,500) can claim the deduction on income from service industries. Additionally, for taxpayers with taxable income more than the above thresholds, a limitation on the amount of the deduction is phased in based on either wages paid or wages paid plus a capital element.
  • Corporate Tax Rates Reduced — The graduated corporate tax rates of 15%, 25%, 34% and 35% are replaced with a single flat rate of 21%.
  • Corporate Alternative Minimum Tax — For tax years beginning after Dec. 31, 2017, the corporate Alternative Minimum Tax is repealed.
  • Increased Section 179 Expensing — Code Sec. 179 expensing, which allows a taxpayer to deduct the cost of qualifying property, is increased to a maximum of $1 million, and the phase-out threshold is increased to $2.5 million.
  • 100% Expensing of Qualified Business Assets — A 100% depreciation expensing of qualifying business assets acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023. The additional first-year depreciation deduction is allowed for both new and used property. This provision replaces the previous 50% bonus depreciation available for qualified new property.
  • Limits on Deduction of Business Interest — For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entities, which requires the determination to be made at the entity level. The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding taxable year. Business interest may be carried forward indefinitely, subject to certain restrictions applicable to partnerships. An exemption for these new rules applies for taxpayers with average annual gross receipts of under $25 million for a three-year tax period ending with the prior tax year.
  • Modification of Net Operating Loss Deduction — The net operating loss (NOL) deduction is modified with the repeal of the two-year carryback and special carryback provisions, though the two-year carryback still applies in the case of certain farming losses. For losses arising after Dec. 31, 2017, the deduction is limited to 80% of taxable income. Carryovers to other years are adjusted to take account of this limitation, and NOLs can be carried forward indefinitely (with some exceptions, notably for insurance companies).
  • DPAD — The Domestic Production Activities Deduction (DPAD) is repealed.
  • Like-Kind Exchange Treatment Limited — The rule allowing the deferral of gain on Like-Kind Exchanges is modified to allow them only with respect to real property that is not held primarily for sale. It can still apply to exchanges of personal property if the taxpayer has disposed of the relinquished property or acquired the replacement property by Dec. 31, 2017.
  • Cash Method of Accounting — Expanded use of the Cash Method of accounting for taxpayers that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. The exceptions from the required use of the accrual method for qualified personal service corporations and taxpayers other than C corporations are retained. Accordingly, qualified personal service corporations, partnerships without C corporation partners, S Corporations, and other pass-through entities are allowed to use the cash method without regard to whether they meet the $25 million gross receipts test, so long as the use of the method clearly reflects income.

These are significant changes that will create new opportunities and challenges for everyone, whether individuals or businesses, looking to minimize their tax burden. Consult with your trusted tax advisor to create a strategy going forward with all the variables that come with tax reform in mind.

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

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