WAKE UP WITH REM: Crypto scammers, lesbian church, and Kenyan basketball

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It’s been an exciting week at the REM Cycle, folks. Raich Ende Malter jumped ahead 13 spots on Inside Public Accounting's IPA 100 and landed smack in the middle of the top ten fastest-growing firms. (Maybe it's because we have such an amazing blog. Just saying.)

We’ve got a great news roundup for you today—a “lesbian-centered” church was recently granted tax-exempt status (which upset all sorts of people), tax choices that might pan out better in the long run, and an interview with a cryptocurrency scammer. Also, videos on why open office plans are a bad idea (and how to fix them) and the transcript of a breakup call.

Will your tax preparer need to be licensed next year? Senator Rob Portman (R–OH) has proposed the Protecting Taxpayers Act (S. 3278), a bill intended to allow the IRS to “regulate paid tax return preparers in a balanced way.” Of course, we strongly recommend that you hire a CPA firm to do your taxes for you, even if it's not us (but we are pretty awesome—see below). [Forbes]

 
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100% bonus depreciation? Yes—no—wait, what? The thing about the Tax Cuts and Jobs Act is that you should “NEVER complete your research after merely looking at the Code.” Here’s why. [Forbes]

A “controversial religious order” is granted tax-exempt status by the IRS. We’re not entirely sure we can print the church’s name, but you’ll see it in the linked article. Controversy or no, the IRS is not mandated to make determinations of a religious organization’s moral worth. [Going Concern]

3 tax breaks that may be better in the long run. In some cases, it’s all about planning ahead. [New York Times]

Accountants upset Ulinzi Warriors… in basketball. Okay, our headline may be misleading, but we just couldn’t help ourselves. We’re excited that an accounting school’s basketball team is on top of the Men’s Kenya Basketball Federation Premier League. Go, KCA-U! [The Daily Nation]

Ethereum giveaway scammer claims to rake in $50-$100K per day. We’re going to guess this guy does not feel obligated to report this income. [Bitcoinstacks.com]

This week's videos

“Proof that open office layouts don’t work.” The basic logic behind the open office is that tearing down physical barriers inspires communication and collective creativity. But does it really?

Phil Hanley presents a dramatic reading of his recent breakup phone call.

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Pitfalls of the New IRS Interest Expense Limitation

Posted by Evan Piccirillo, CPA

EDITOR'S NOTE: This article is also featured in the August 7, 2018 edition of the New York Real Estate Journal.

The sweeping revision to the U.S. tax code known as the Tax Cuts and Jobs Act contains many provisions that present pitfalls and planning opportunities.  One such provision limits the tax deduction on interest expense.  This presents certain tax-planning considerations for taxpayers, especially those who do business relating to real estate.

Under the revised code, the federal tax deduction for net business interest expense is limited to 30% of a taxpayer’s “adjusted income” at the entity level, with the excess carrying forward indefinitely.  Adjusted income under this provision is business earnings before interest, and until tax years beginning in 2022, before depreciation and amortization as well.  Net operating losses and the new 20% pass-through deduction are ignored when determining adjusted income.  For example, in 2019 a taxpayer has $40 of taxable income, $30 of interest expense, and $10 of depreciation and amortization.  Adjusted income is $80 ($40 + $30 + $10) and the limit on interest deduction is $24 ($80 * 30%).  In this case, $6 ($30 - $24) carries forward to the subsequent year.

This limitation is a detriment to taxpayers who finance a significant portion of their operations with debt, which is common when operating rental real estate.  Furthermore, rental property debt is often refinanced in order to distribute cash representing the appreciation of the property’s value, usually to fund additional acquisitions.  Since the debt doesn’t go away the excess interest may keep carrying forward, in effect permanently.  Some businesses may have to consider changing their method of financing operations to shift from debt to equity to counter the limitation.

Fortunately, in certain situations taxpayers can avoid limiting their interest deduction.  

The Small Business Exemption

Taxpayers with average gross receipts of less than $25 million over the previous three years ($25M test) are exempt from the interest limitation described above.  Since $25M is a high threshold, many taxpayers will be relieved to hear about this exemption, if not for the following pitfalls:

Pitfall 1 - Aggregation rules

The $25M test for the small business exemption is applied using somewhat complex aggregation rules.  Receipts from entities with common ownership are grouped together for the test.  If the group fails the $25M test, the entities in that group will not be able to avoid the limitation this way.  For example, two rental properties are owned in partnerships by two individuals, split 50/50.  Each property has average gross receipts of $15M, well below $25M.  But the receipts of these properties are combined for the small business test.  In this case, $30M is greater than $25M, so both partnerships fail the test and are subject to the limitation.  This provision is meant to counter the obvious strategy of splitting up existing businesses into smaller companies to avoid the limitation.

Pitfall 2 - Entities with limited investors

Taxpayers who realize taxable losses and have more than 35% of their ownership comprised of limited investors may also fall into the “tax shelter” trap.  Consider a rental property owned by a partnership of five individuals, each with a 20% interest.  Three partners are actively engaged in the business; the other two are limited partners. If the property experiences a tax loss in a given year, it is considered a “tax shelter” in this context, since a ratable amount of the loss is allocated to the two limited partners whose ownership exceeds 35%.  In this case, the small business exemption does not apply, regardless of the results of the $25M test; therefore the interest deduction is subject to limitation.  This “tax shelter” test is applied each year, which means that in profitable years, the limit may not apply, but in loss years it will.  Consider buying out limited investor interest that exceeds 35% to avoid this trap.

Electing Real Property Trade or Business

If a taxpayer does business in the real estate industry and elects to depreciate real property under the Alternative Depreciation System (ADS), that taxpayer will not be subject to the limitation.  ADS provides for a slower recovery period than usual and doesn’t allow the instant cost recovery of bonus depreciation. If you are willing to decrease your annual depreciation deductions, you can get out of this limitation regardless of the other factors.

The ADS election may seem an obvious choice, but benefit and cost must be weighed before making a decision.  The election is irrevocable; long-term consequences must be considered.  Also, an entity that may be subject to the 30% limitation might have enough adjusted income to absorb all interest expense, nullifying the benefit of the election.  In addition, losing the benefit of bonus depreciation can be a significant drawback.

All businesses need to understand the consequences of the new interest deduction limitation, but real estate businesses have an extra option to reduce their tax liability.  Shifting debt to equity, buying out limited investors, and (for real estate businesses) making the ADS election are viable options to counterbalance the new limitation.

WAKE UP WITH REM: Soda tax, tax reform, a reformed form, and marijuana tax

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We can't think of a clever opening paragraph this week. If you can think of one, leave it in the comments below.

Soda taxes again. Several states, including California, Pennsylvania, Oregon, Mississippi, Arizona, and Michigan, are either considering or have already adopted food and/or soda taxes. But what happens when individual municipalities have their own food taxes? [Reason.com]

Tax Reform 2.0. Rep. Kevin Brady (R-Texas), Chairman of the House Ways and Means Committee, released a two-page outline of a plan to reform the nation’s most recent tax reform. The idea is nothing new — for instance, several states have already drafted legislation to mitigate the SALT deduction cap — but it will be interesting to see Brady’s finished plan. [Bloomberg]

ICYMI: Facebook stock drops by more than the worth of the entire global cheese market. John Oliver hopes that this will inspire the return of MySpace. (Strong language warning.) [YouTube]

At last! The new, improved(?) W-4. You know that annoying form you fill out every once in a while? The one where you fill in zeroes and ones, etc., to calculate the number of withholding allowances you can claim? The IRS has revamped it, and you’ll find a few surprises. [Forbes]

New Jersey budgets $20M in medicinal marijuana revenue for FY 2019. But based on tax data from previous years, this would mean handing out more than twice the number of existing cannabis prescriptions. Unless Willie Nelson moves to the Garden State, experts warn that’s not going to happen. [NJ.com]

This week's videos

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

New sexual harassment guidelines for NYS employers

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Posted by Lucille Southard

The #MeToo movement and innumerable allegations of unwanted and inappropriate sexual advances in the workplace prompted New York legislators to include several provisions in the newly-passed state budget designed to prevent sexual harassment. While not all provisions take effect immediately, we encourage employers to begin preparing now. This post is a primer on what New York State employers will be expected to do to ensure a safe workplace for all workers.

Annual sexual harassment training

By October 9, all New York employers must implement sexual-harassment training programs. A model program created by state agencies is available if employers are unable to design their own sexual-harassment training programs that meet or exceed New York State standards.

Programs must include a definition of sexual harassment and specific examples of what constitutes inappropriate conduct, as well as detailed information on federal and state statutory remedies available to victims of harassment. Employers must also explain employees’ rights of redress and how to bring complaints.

As of now, the new laws are unclear about specific guidelines for the number of hours of training will be required and how the training can be administered (e.g., in person, webinar, etc.).

Employers must keep records of employee training for a minimum of three years, including signed acknowledgement forms from the employees who attended.

Nondisclosure agreements

Employers may no longer include confidentiality provisions in settlement agreements, except when the complainant requests confidentiality.

A related federal provision of the Tax Cuts and Jobs Act (TCJA) eliminates potential deductions for employers’ legal fees and settlement payments incurred by defendants’ sexual harassment cases that are subject to nondisclosure agreements.

Prevention policy

New York State employers must provide a written sexual-harassment policy and distribute it to employees. This policy must include:

  • A statement prohibiting sexual harassment and providing examples of what constitutes sexual harassment
  • Information about federal and state sexual-harassment laws and the remedies that are available to victims—and a statement that there may be additional local laws on the matter
  • A standard complaint form
  • Procedures for a timely and confidential investigation of complaints that ensures due process for all parties
  • An explanation of employees' external rights of redress and the available administrative and judicial forums for bringing complaints
  • A statement that sexual harassment is a form of employee misconduct and that sanctions will be enforced against those who engage in sexual harassment and against supervisors who knowingly allow such behavior to continue
  • A statement that it is unlawful to retaliate against employees who report sexual harassment or who testify or assist in related proceedings

Non-employees

Until now, contractors, vendors, and consultants have not been covered by New York State sexual harassment laws. As of April 11, 2018, Section 296-d of the New York State Human Rights Law prohibits an employer to permit sexual harassment of non-employees in the employer’s workplace. If harassment takes place and the employer knows or should reasonably know, but fails to take immediate corrective action, the employer can be held liable.

In conclusion

Employers should review and adjust existing policies and training to ensure a harassment-free workplace. For practical purposes, compliance will limit employer liability. Of course, the most important purpose of adhering to the new laws is to protect and support all workers with a safe working environment.

If you have any questions, please don’t hesitate to contact me directly.

WAKE UP WITH REM: Trade secrets, co-working, and SALT lawsuits

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Taxes don’t take the summer off! Trade secrets, 529 plans, and co-working spaces are this week’s topics. We’ve also got videos for you: develop professionally by learning how to hack networking like a champ, and join us in our bemusement at a state witness who claims not to know what a photocopier is.

Another lawsuit to preserve the SALT deduction. Tuesday, the states of New York, Connecticut, New Jersey, and Maryland joined to sue the federal government, seeking to void the $10,000 cap on federal deductions for state and local taxes. [Reuters]

Be careful when filing that 10-K. A recent study indicates that companies who disclose the existence of trade secrets in their 10-K reports—not the secrets themselves, but the existence of the trade secrets—increase their risk of a cyber-attack by 30%. [Accounting Today]

 

PROFESSIONAL DEVELOPMENT: What if all the advice we've heard about networking is wrong?

 

Is it time to let your office lease run out? As co-working gradually becomes the norm for startups and smaller companies (and is growing in popularity among established businesses), CPA firms are beginning to ask whether permanent offices are really necessary. [CPA Insider]

How will the new tax law affect education-related tax breaks? Answer: Mostly, it won’t. But in certain cases, 529 plans are now eligible to take advantage of federal income tax-free withdrawals of up to $10,000 per year (yay!) …unless your state imposes state income tax on these distributions (boo!). [MarketWatch]

 

What is a photocopier? “I don’t understand the question.”

 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

S Corp considerations for 2018 owners’ compensation resulting from the TCJA

 
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Posted by John Boykas, CPA

Owners of certain flow-through entities may qualify for reduced tax rates on qualified business income earned by the entities via the newly enacted Section 199A, part of the Tax Cuts and Jobs Act (TCJA).  If you operate as an S Corp, you may be able to take better advantage of these reduced tax rates simply by reviewing the compensation structure of payments to owners.  This planning technique must be considered during 2018 and will be relevant as long as Section 199A remains in effect (this provision sunsets in 2026).

Simply put                      

Section 199A allows for a 20% reduction in pass-through income to certain qualified shareholders (see below).  This is an easy way to save money.  Simply put, reducing the salary of owners will increase the net income flowing through to the shareholders, thereby lowering the tax rate; for example, if you are currently paying the top rate of 37%, you may qualify for a reduction of that percentage by 20%, resulting in a tax rate of only 29.6%.  Furthermore, the profits may not be subject to Medicare tax, resulting in an additional 2.9% savings.  As in the past, shareholders should be paid “reasonable compensation,” but this concept is not specifically defined.  Your trusted advisor should be able to determine whether you are in the lowest end of the reasonable compensation range in order to achieve the maximum tax benefit.  Of course, most people do not want to take home less money, but this can be solved by paying the reduction in salary as S Corp distributions, taking care to ensure that appropriate estimates are paid so that underpayment penalties are not incurred.

Example:  A small distributor where the owner historically receives a $400,000 salary that results in $100,000 net corporate income.  Without any planning, the owner will pay tax on the salary at normal rates but will receive a 20% reduction in the $100,000 corporate income, resulting in tax being paid on $480,000 ($400,000 salary plus 80% of $100,000).  With careful planning, we can reduce the salary to a reasonable $200,000, resulting in a net corporate income of $300,000.  The owner now pays tax on $440,000 ($200,000 salary plus 80% of $300,000).  This is a significant tax savings.

Now the details

For 2018, if the owner’s taxable income is less than the threshold amount ($315,000 for married filing jointly and $157,500 for other individuals), there are very few limitations.

However, two major limitations will be phased in once taxable income exceeds the threshold amounts, and will be fully applicable once taxable income is above $415,000 for married filing jointly and $207,500 for other individuals.  Specifically:

  • the deduction will not apply to “specified businesses,” e.g., doctors, lawyers, brokers, accountants, etc. (Architects and engineers are exempt from this limitation because they have better lobbyists); and
  • the 20% reduction will be limited to 50% of W-2 wages (or in the alternative 25% of W-2 wages plus 2.5% of certain property and equipment cost).  So, in certain situations, it may actually be beneficial to increase wages.

The takeaway             

There are many nuances and uncertainties regarding the application of Section 199A. And while the Treasury will eventually be issuing guidance, diligent business owners and their trusted tax professionals need to become familiar with them now.  Speak to your advisor sooner than later to discuss an optimal compensation target for 2018.

WAKE UP WITH REM: Fizzy beverages, the Nancy Drews of accounting, and a tax “surprise”

The Northeast is experiencing an unrelenting heat wave. Why not stay cool with some tax and accounting news from around the world?

Arkansas lawmaker “surprised” at his arrest for not filing or paying state taxes since 2003. What’s that you say? It’s illegal not to file or pay taxes for 15 years? Who’d have thunk? He’ll probably be surprised to learn he owes $260,000 in back taxes, too. [WREG.com]

Bottoms up! Following intensive lobbying from beverage companies like Coca-Cola and PepsiCo, California governor Jerry Brown signed a bill banning local taxation of sugary sodas. Many cities in the state are “looking toward taxes to discourage people from drinking beverages linked to obesity.” [ABC News]

 
 

Move over, Nancy Drew—the forensic accountants are in town. Forensic accountants are the unsung heroes of Singapore. Here’s why. [Business Times]

SPOILER ALERT. Accounting Today has published its summer reading list for 2018. The headline claims it’s “summer reading for accountants,” but take our word for it – there’s a lot of good stuff for just about any adult on this list. (Where’s the spoiler, you ask? Fine: It was all a dream. Happy?) [Accounting Today]

 

50 people try to make scrambled eggs. This video has the entire REM Cycle staff scratching their heads and wondering how some of these people even made it to adulthood.

 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

The taxes, they are a-changin'

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Posted by Courtney Kopec, CPA

A recent Supreme Court decision upheld a South Dakota sales tax law requiring sales tax to be collected by large internet retailers, such as Wayfair and Overstock, who are not physically present in South Dakota, but “maintain an extensive virtual presence.” The law applied only to out-of-state sellers who deliver more than $100,000 of goods or services into the state or engage in 200 or more separate transactions. For South Dakota, a state with no income tax, the effect of the losses from online sales tax revenue to state and local services was critical. While the Supreme Court decision seems reasonable, it effectively gutted the bright-line physical presence standard established by the Quill decision. Prior to the Supreme Court decision, businesses relied on the Quill decision to avoid nexus (a connection to a state upon which the obligation to pay or collect sales tax is based).

The physical presence standard limited the burden of businesses required to collect sales tax to those with a physical presence, such as an office, employee, or inventory. In this new decision, the Court reasoned: “Each year, the physical presence rule becomes further removed from economic reality and results in significant losses to the States. These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause.”

The Court opinion further explained that the physical presence test espoused in Quill was “flawed on its own terms” and could no longer uphold, because a business need not have a physical presence in a State to satisfy the demands of due process. This resulted in market distortions caused by the desire of business to avoid tax collection and a “judicially created tax shelter for businesses that limit their physical presence. … [the] rule produces an incentive to avoid physical presence in multiple states. And this Court should not prevent States from collecting lawful tax through a physical presence rule.”

What’s next for nexus?

Other states, including New York, that passed similar sales tax legislation based on “click-through nexus” as far back as 2008 may now rely on the South Dakota law as a constitutionally upheld example. The Supreme Court noted the effects of the South Dakota law as minimizing the burden on interstate commerce by including a safe harbor provision on certain transactions “so small and scattered that no taxes should be collected,” forgoing retroactive application, and through the Streamlined Sales and Use Tax Agreement providing state-funded sales tax administration software intended to reduce compliance costs. While the South Dakota law has been constitutionally upheld, the Court did not address economic nexus laws in other states, nor the possibility of imposing sales tax retroactively.

Because no international treaty provisions apply to sales tax, foreign sellers are subject to the same rules as domestic sellers.

Will states seek back taxes?

In its case, South Dakota noted that advances in computer technology have made it easier to determine appropriate sales tax based on the purchaser's location and that requiring such "poses a minimal obstacle."

In the summer of 2017, the Multi-State Tax Commission Online Marketplace Seller Voluntary Disclosure Initiative offered sales tax amnesty. Twenty-five states offered to waive all past tax, interest, and penalties for companies that agree to register for and collect sales tax for online sales going forward.

Therefore, it stands to reason that states will engage in litigation to verify how much sales tax revenue they can attempt to collect and the constitutionality of the sales tax statutes already in place. However, the guidelines written in the decision stressed: “The Court has consistently explained that the Commerce Clause was designed to prevent States from engaging in economic discrimination so they would not divide into isolated separable units.”

Federal legislation from Congress has proposed a destination-based collection system based on the location of the buyer and the local sales tax rate where the buyer receives the product.

What about my company’s exposure?

The evolving concept of nexus also applies to income and franchise tax, so a good understanding of the regulations is critical. The analysis and interpretation of these laws is challenging, in part because the Court’s most recent decision upended prevailing state statutes. Now, a modern “economic nexus” standard is required, but not yet written nor agreed upon by the fifty United States. We can expect revised statutes based on a new form of nexus to potentially broaden the states’ claim on income and franchise tax.

While the Court favors prospective legislation, companies that have received notice from state taxing authorities regarding past sales transactions should not consider the Court’s recent decision as constitutional protection.

Our recommendation

When a sales transaction is complete, it is difficult to impossible to retroactively collect sales tax for which the taxpayer may be responsible upon audit. What should have been a tax collection process becomes an expense to the seller.

In states that already have sales tax requirements for online sales and have enacted legislation similar to South Dakota, such as Georgia, we recommend registering to do business in that state and complying with sales tax collection. The odds are they will offer some type of amnesty.

If a state has not yet enacted legislation, we recommend a “wait-and-see” approach that may offer prospective amnesty. This decision gives some certainty that companies with sales in other states will have to register and collect sales taxes according to each state’s laws.

If your business has transactions out-of-state and you would like to review whether your business has nexus in another state, contact your CPA to review the latest guidelines.

WAKE UP WITH REM: Attack of the bobbleheads

 
 

It’s been a weird week, folks. Professional skateboarder Tony Hawk gave the keynote speech at an AICPA event. A tax prep titan could tumble, thanks to the Tax Cuts and Jobs Act. And the Ohio State Supreme Court is hearing arguments about bobbleheads, because why not.

To bobble, or not to bobble? The Cincinnati Reds give out free bobblehead figures of players to ticket buyers at certain games. The state of Ohio wants to tax the bobbleheads. The Cincinnati Reds, on the other hand, do not feel they should pay sales tax on the freebie bobbleheads. Now the Ohio Supreme Court is hearing arguments regarding the taxation of bobbleheads. And we’re making a big deal about it, because we just love typing the word “bobbleheads.” [Cincinnati Enquirer]

 

How to save the world (or at least yourself) from bad meetings. An epidemic of bad, inefficient, overcrowded meetings is plaguing the world's businesses - and making workers miserable. David Grady has some ideas on how to stop it.

 

H&R Block stocks plummet, due to the Tax Cuts and Jobs Act. While Trump’s tax reform slashed corporate taxes from 35% to 21%, not every corporation is celebrating. Due to vastly simplified filing requirements for individuals, tax prep service H&R Block will be working on far fewer complex returns. As the company charges its clients based on the complexity of their returns, analysts predict disappointing consequences for the coming year. [Bloomberg]

[Sorry, we have to say it again – Bobbleheads.]

Skateboarders and accountants: a match made in heaven. Wednesday, professional skateboarder Tony Hawk gave the keynote speech at the AICPA’s Engage event in Las Vegas. You may be surprised to learn that Mr. Hawk is an astute entrepreneur, having started several successful companies (and some not-so-successful companies). He credits his accountant with keeping him on track. [Accounting Today]

New way to pay alimony: The tax advantages of alimony will only apply for couples divorcing prior to December 31, 2018. Expect negotiating IRAs to pick up the slack. [CNBC]

 

In an attempt to make up for the bobblehead overload, here are 10 songs you’ve heard and don’t know the name of.

 

Wake Up With REM is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Navigating the Tax Cuts and Jobs Act: Volume 3 – Depreciation

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Patience is not a virtue in the world of tax and accounting.  Taxpayers generally prefer to recover the cost of investments in capital property as rapidly as possible.  Thanks to recent changes made by the Tax Cuts and Jobs Act (TCJA) in 2017, there is less waiting and more deducting.

For tax purposes, most taxpayers depreciate fixed assets under the Modified Accelerated Cost Recovery System (MACRS), which, as the name suggests, already offers accelerated tax deductions as compared to the de facto default method (straight-line).  A certain method under MACRS front-loads the magnitude of the tax deduction to the beginning of the useful life of the asset.  We also have even quicker options (if available) that provide even more up-front expensing: Section 179 and bonus depreciation.  Both of these options have been enhanced by the TCJA.

Section 179              

Under this section of the code, 100% of the cost of an asset can be written off as a tax deduction.  The amount of Section 179 (Sec. 179) benefit a taxpayer can receive in a given year is limited to taxable income; the excess carries over to future years.  The TCJA has expanded the assets that are eligible to this type of expensing.  In the past, Sec. 179 was not available for most real property, but under the new law, “Qualified Improvement Property” is now eligible (things like the roof of a building and components of A/C systems), as well as furnishings used predominantly in lodging activities. Be aware that qualified improvement properties are nonresidential only.

In addition, the limit on Sec. 179 expensing was increased from $500k to $1M per year, subject to a phase-out threshold increase from $2M to $2.5M (indexed for inflation).  The phase-out threshold decreases your expense by costs of fixed asset additions in a given year that exceed the phase-out threshold, dollar-for-dollar.  I always stress that the limit ($1M) is an absolute limit for any taxpayer.  One must be very careful when using Sec. 179 on pass-through entities, because if an individual receives more than $1M in Sec. 179, the excess deduction is lost permanently.

These changes became effective January 1, 2018.

Bonus depreciation

Bonus depreciation was introduced as a “special” option for taxpayers to incentivize investing in capital property back in 2002 for a limited time.  For obvious reasons, bonus depreciation was very popular and was reintroduced several times since in subsequent legislation.  The deduction has varied from 30% - 100% over that period and was eligible for qualifying property, which had to be “new” and have a useful life of 20 years or less.  Bonus expense is figured after Section 179, if applicable.  Under the TCJA, taxpayers can enjoy 100% bonus depreciation and the “new” property requisite has been lifted.

These changes became effective September 27, 2017, so be aware that certain property may be eligible for 100% bonus on your 2017 tax return.

Other issues

There is a slight snag in the TCJA where “Qualified Improvement Property” isn’t granted the intended 15-year life, thus making it ineligible for bonus depreciation, but it is widely believed that this will be fixed in a technical correction bill.  Your move, Congress.

Many states do not recognize bonus depreciation and have different limits for Sec. 179.  Failing to recognize and plan for those differences might result in an unwanted (and unintended) surprise state tax bill.

The Alternative Depreciation System (ADS) must be used for certain assets or certain taxpayers and uses a straight-line method (slow).  Additionally, ADS has a longer recovery period and may not use accelerated expensing methods described above (even slower).  ADS has increased relevance in the world of the TCJA for reasons we will explore when we discuss the business interest deduction limitation in a future post.  Under ADS, the useful life for residential real property was shortened from 40 years to 30 years, which puts it more in line with the MACRS life of 27.5 years.

Every change highlighted above is a boon to taxpayers seeking to accelerate tax deductions on the cost of capital investment property.  These changes apply to more than just rental properties; all businesses with tangible property additions are impacted. In some cases, these changes can also be applied to residential properties, but that’s a longer and more in-depth conversation we can parse out at a later date.

Care must be taken when dealing with Sec. 179, and we can’t forget to consider the state differences.  Taxpayers need to understand the nuance in the new law (and impending technical corrections) and how to maximize the benefit.  Reach out to your advisor, or give me a call to discuss.