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.

WAKE UP WITH REM: Tax refugees, excess cash, and Peruvian chickens

 
 

We hope you like chicken, because that’s the theme of this week’s “Wake Up” post. Live chickens, fried chickens, patriotic chickens, and Wall Street firms that are chickening out of New York’s higher taxes all receive our careful egg-zamination. (Sorry.)

But seriously, how will the Tax Cuts and Jobs Act treat chickens? U.S. chicken importers need to know: are live chickens in Peru equivalent to cash? Liquid markets exist for them, so… maybe? [Forbes]

The burden of excess cash for corporations – what to do with all that extra spending money? What to do, what to do... [Accounting Today]

Can these cities impose a “Google tax” or “Apple tax?” Seattle’s “Amazon tax” may be inspiring other cities in Silicon Valley. [CNN Money]

 

Program your mind for success. Carrie Green started her first online business at the age of 20, while studying Law at the University of Birmingham. Within a few years she took the business global, selling throughout the UK, USA, Canada, Australia and Europe and receiving over 100,000 hits on the website every month.

 

The exodus has begun. Increasing numbers of businesses and individuals are pulling up stakes and moving from the Empire State to cheaper climates. Can New York afford to lose more “tax refugees?” [New York Post]

Speaking of a tax exodus, we recently reported on Alliance Bernstein’s move to Nashville for a more attractive tax environment and some of that spicy Nashville hot chicken. It looks like other Wall Street firms are following suit, migrating to Florida… [The Street]

 

She may be shy at first, but Jokgu the chicken heroically overcomes her shyness to peck out “America the Beautiful” on a keyboard. If you don’t have much time, skip ahead to 1:12 for the money shot.

 

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 IRS is not amused with states' attempts to circumvent federal tax changes

 
 

The recently enacted Tax Cuts and Jobs Act (TCJA) makes some potentially detrimental changes to state and local tax (SaLT) deductions, namely a limitation on the tax deduction of $10k for married filers and $5k for single filers for state taxes.  Prior to the TCJA, there was no such limitation (even though some taxpayers were hit with the Alternative Minimum Tax, but that is a different discussion).  This presents a problem for taxpayers in “high-tax” states: any jurisdiction that imposes a high income tax, a high property tax, or both, such as New York, New Jersey, California, and Connecticut.  The TCJA did not cap the deduction on charitable contributions; in fact, they increased the limit from 50% to 60% of adjusted gross income for certain types of gifts, and even then excess contributions are allowed to be carried over into subsequent years.

If only there was some way to decrease the amount of state taxes paid to say, less than $10K, while at the same time increasing charitable gifts!  State legislators in these high-tax states were quick to cook up a work-around to this change and came up with a doozy.  States will establish state-run charitable trust funds.  Taxpayers would be allowed a state tax credit of some percent (New York provides 85%; New Jersey, 90%) of their contribution to these funds, and in theory, also get a deduction on their federal tax return for a charitable contribution.  Thus, states would shift the character of payment from one category to the other and there will be much rejoicing (and tax deductions).

 
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The IRS wasted little time responding and announced that they will release proposed regulations to provide guidance to taxpayers on how the IRS is the authority on the characterization of charitable contribution and it doesn’t matter what the states say.  The central factors in determining if a charitable contribution is deductible is that it 1) is paid to a qualified organization (which the states’ trust funds can meet) and 2) the deduction must be reduced by any benefit the taxpayer receives.  If you have been paying attention, you will have noticed that, in this arrangement, the taxpayer would receive a benefit for their contribution in the form of a tax credit, and therefore they would have to reduce their charitable contribution deduction by the state tax credit they received.  This results in a net zero benefit to taxpayers.

More than anything, this is posturing by politicians in state and federal positions.  Unfortunately for those of us in high-tax states, we will have to deal with paying taxes to our state and not getting the benefit we were used to getting in the past.  There are other important issues that states will have to address in the wake of the TCJA which we will discuss in future posts.  If you would like to complain about this or other topics, reach out to your trusted advisor, or give me a call.

Wake up with REM: Blockchain, tax fraud, and... Cheech & Chong?

  Richard "Cheech" Marin and Tommy Chong.  Source

Richard "Cheech" Marin and Tommy Chong. Source

Um, wow. The last few days have been pretty exciting: a new system promises to change the face of bookkeeping, Apple fails to avoid paying taxes in Ireland, and marijuana entrepreneurs find themselves holding the bag (literally). We’re always looking for ways to help our readers with their professional development, so we also have some conversational advice to bring your communication skills to the next level, as well as an emotional support velociraptor.

You’re welcome.

An Ohio tax preparer was acquitted on tax fraud charges after almost five years of investigation by the IRS, including a sting operation in which an undercover agent failed to get the defendant to include an erroneous Child Tax Credit claim. [Accounting Today]

10 ways to have a better conversation:
When your job hinges on how well you talk to people, you learn a lot about how to have conversations - and that most of us don't converse very well.

Artificial intelligence is coming to a ledger near you! PeaCounts, a blockchain-enabled bookkeeping system, is expected to launch this summer. “Business owners will no longer require a dual-entry system with manual reconciliations,” said PeaCounts co-founder Crystal Stranger, in a statement. “Combined with machine learning, PeaCounts has developed a system that makes manual entry a thing of the past.” [Accounting Today

Do you itemize your deductions? This might be a good time for a checkup on your taxes. [Forbes]

In our last Wake Up, we mentioned AllianceBernstein is moving to Nashville for local tax incentives. You’ll never guess who’s moving into their old building… [Globest.com]

Ireland takes a big bite out of Apple as the tech giant pays Ireland its first tranche of disputed taxes. [Reuters]

Cheech and Chong they’re not—marijuana entrepreneurs face unusual challenges in paying their taxes. Federal laws necessitate bags of cash and stealthy deliveries: this is how pot start-ups pay taxes. [New York Times]

 

My dinosaur is a service animal:
Just because it's a Velociraptor with knives for teeth doesn't mean it's not my best friend.

 

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.

Tax Cuts and Jobs Act Supplemental: Meals and entertainment

Posted by Evan Piccirillo, CPA

For years, many businesses have been keeping track of expenses for meals and entertainment in a single account with little need to communicate with their accountant; it was understood that 50 cents of each dollar would be a tax deduction. No more. Effective January 1, 2018, the Tax Cuts and Jobs Act (“TCJA”) makes notable changes to the tax treatment of certain disbursements relating to these categories of expense. As a result, the accounting for these expenses needs to be reconsidered. Let me break it down for you.

Prior to 2018, meals and entertainment expenses were limited to a 50% tax deduction, unless certain exceptions applied that would allow a 100% deduction. Under the TCJA, entertainment expenses are 0% tax deductible, with very few exceptions, while meal expenses are generally still 50% deductible, with some important changes to the exceptions. Understanding these exceptions is critical to ensuring your business receives the proper tax deduction.

Here is a list of fully (100%) deductible meal expenses:

  • Expenses included in the wages of the employee or included in income of the non-employee recipient (i.e. in W-2 wages of the employee or on a 1099 to a non-employee)
  • Expenses for an employee event (like a party)
  • Expenses for the general public (either as advertising/promotion or goodwill)

Here are 50% deductible expenses:

  • Meals with clients
  • Employee travel meals
  • Meals provided to employees for the convenience of the employer (but 0% after 2025)

And the 0% deductible expenses:

  • Entertainment for employees or clients (including sports and events tickets, membership dues to clubs, etc.)

Aside from the 50% to 0% change to entertainment expenses, the next most notable change is that of 100% to 50% (and later to 0% after 2025) to meals provided to employees for the convenience of the employer. In the past, these were considered de minimis fringe benefits and received a dollar-for-dollar tax deduction, but under the new law these kinds of expenses must be included in an employee’s income to be 100% deductible or fall to the 50% category. Not good for hungry employees and their employers.

To accommodate these new tax rules, businesses have to disambiguate meals and entertainment into entertainment (which is nondeductible), meals that are 50% deductible, and meals that are 100% deductible on their books. In absence of these separate ledger accounts, tax preparers will have to inquire about the allocation and taxpayers will need to analyze the charges booked to such an account, which can add time and contribute to errors.

Additionally, employers may need to review their policies and procedures for providing meals and/or entertainment to their employees and clients. Certainly they will need to reconsider those sports facility box seats. Also, since parties for employees are 100% deductible, perhaps it’s time for businesses to start throwing more parties?

If you would like additional guidance on this topic, contact your trusted advisor to assist you in making decisions going forward and to establish sound procedures to properly account for meals and entertainment expenses on a prospective basis.

Wake up with REM: Pretty fly for a WiFi

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A lot has changed since the early 1990s. The internet is no longer an amenity; it’s a utility. In our current corporate culture, WiFi connectivity has come to be considered more of a right than a privilege. Right or wrong, the internet is here to stay—and today’s tax news reflects that. Read on, Macduff…

  • Sales tax bonanza for towns with an Amazon warehouse has other cities eyeing a cut. [Sacramento Bee]
  • The Inevitable Clash Between Seattle and Amazon Has Begun [Slate]
 
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  • Stormy Daniels, Michael Cohen, Giuliani, Trump, and (drumroll) TAXES! Oh, come, now. You know we're a tax blog, right? How could we be talking about anything else? [Forbes]
  • Keep your head in the cloud, because that's where your ledgers will be. 5 key tech innovations helping accountants transform their businesses. [Accountancy Age]
  • Tennessee tax breaks are poaching Wall Street businesses and bringing them to Nashville. [Bloomberg]

And in keeping with our internet theme, here's how we ended up with the word "meme." It's probably not what you think...

 
 

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.

Navigating the Tax Cuts and Jobs Act: Volume 2 – Rate reductions

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Posted by Evan Piccirillo, CPA

The most straightforward and significant change of the Tax Cuts and Jobs Act (TCJA) is the reduction in income tax rate to corporations and individuals.  This is the “giveth” of the TCJA, and while there are many “taketh aways,” which we will discuss later on, all things being equal, most entities and people will consequently pay less tax.

Corporations

Corporations pay a flat 21% tax on income, and this provision is permanent (meaning there is no language in the law that builds in an expiration of this provision).  Prior to 2018, corporations would pay tax based on graduated rates as determined by their taxable income for the year (taking into account the dreaded alternative minimum tax (AMT)).

Here are the rates for 2017:

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You may have noticed that this table contains a rate that is lower than 21%, namely the lowest bracket for corporations with taxable income of less than $50k.  Those corporations will be paying more tax under the new regime.  That aside, the 21% rate will result in a much lighter tax burden for most corporations.  I stress here again that this is under an “all things being equal” scenario.  There are other provisions of the TCJA (which we will address in future posts) that will add to these corporations’ tax burdens, given certain circumstances.

Fiscal year taxpayers (that is, corporations with year-ends other than 12/31) will pay tax on a blended rate.  The blended rate is the sum of the ratios of the old tax rate for the number of days in 2017 and the new tax rate for the number of days in 2018.  For example a June 30 year-end will have a blended rate of about 28%.

Also, the corporate AMT is eliminated!  Certain AMT credits will be recoverable as well, which mean those benefits will not be lost.

Individuals

Individuals will pay a 7-bracket, progressive tax.  The rates for most of the brackets drops from 1-3% and most brackets will begin at a higher dollar amount of income as compared to prior years.  This rate reduction will be in effect for only 8 years and then revert to the pre-2018 structure, so remember this “giveth” has an expiration date, unless our legislators decide to extend it.  Prior to 2018, the tax methodology was similar, but at less favorable rates.

In spite of many of the itemized deductions that are suspended while these individual rate reductions are in effect (which we will discuss in later posts), many individual taxpayers will be pay less tax under this regime.  It may vary on a case-by-case basis (as individual tax always does), but for the most part, this is a clear benefit to individuals.

The (kind of) bad news is that the individual AMT has not been eliminated in fact, but I do believe that it has been eliminated in effect.  The thresholds and exemptions have been increased and the primary culprit in determining AMT applicability for most taxpayers (the itemized state tax deduction) is severely limited.  It will be a very rare instance that AMT will apply.

The TCJA has many “giveths" and “takeths", but the rate reductions are a clear “giveth” on the corporate side and individual side alike.  Don’t get too excited yet, because our legislators have found many, often very complex, ways to recover some of this lost tax revenue.

If you have any questions or would like to better understand this, reach out to your trusted advisor, or email me.  Stay tuned for our next post, where we will explore a significant “taketh” provision!

Wake up with REM: "Potpourri" for $200, Alex

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When you’re an accountant, tax is never trivial. But because today’s “Wake Up” stories have no common theme, we’ve chosen “Potpourri” as our category, and included some trivia questions just for you.

Trendsetting in accounting [Accounting Web]

Will $12 billion tax bite drive rich from California? [California Matters]

Did the new tax law cut your taxes? You might be surprised [Minnesota Public Radio]

Can taxes shape an industry? Evidence from the implementation of the “Amazon Tax” [Wiley Online Library]

 

Feeling smart today? Test your tax trivia with The REM Cycle's Tax Jeopardy Quiz.

Got a tax trivium we missed? Let us know in the comment section below.

 

We'll let Alex Trebek have the last word...

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.

Top 10 things tax accountants will be doing after tonight's tax deadline

After a three-month marathon session of tax work, many tax accountants will be breathing a sigh of relief at midnight on April 17. Once the realization sets in that the due date has passed and they are unburdened from the intense weight of that deadline, now what? Time to deflate and recharge is essential to anyone that has just gone through such a gauntlet. The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Wednesday, April 18, 2018.

Some of the fill-in responses were great, but didn't receive enough votes to make it onto the chart. Honorable mentions include:

  • "Sit in silence and wait for the next tax season."
  • "Celebrating my 47th wedding anniversary." Congratulations, by the way!
  • "Keep working on April 30th deadlines. Sincerely, the financial services group."
  • "Watch a Mets game all the way through without falling asleep."
  • "Deal with all the file rejections -- tax season doesn't end on the deadline."
  • "Celebrating my birthday April 18th, along with many checked items." Happy birthday!
  • "Have the luxury of deciding what to do when I wake up that day. Not knowing is exciting and may be something wonderfully unexpected."

What are your plans for tomorrow? Let us know in the comments section below.

Wake up with REM: Rube Goldberg edition

Income taxes are like Rube Goldberg machines: a movement by one element will impact another in surprising ways. Income goes up, some limitations go down; check this box, now we’re getting a refund. Yet somehow, by line #63 (Total Tax), we arrive at an answer the taxpayer and the IRS can both agree on (we hope). With that in mind, The REM Cycle presents tax news with a liberal sprinkling of Goldbergian facts and videos to get you through this final week of tax season. Hang in there, folks!

The IRS’s overall audit rate continues to plummet, with less than 1% of individual and partnership returns being audited. Does this situation mean more people and companies will cheat on their taxes? The answer? “It’s complicated.” [Forbes]

Debt among older Americans is rising fast. In 2017, retired workers received an average of $1,404 per month in Social Security benefits—but this amount can be reduced due to student loans. Mortgage and credit card debt only compound the problem. What to do? [CNBC]

The TCJA’s expensing and income tax changes may become permanent. Will it affect you? Will it even come up for a vote? [TaxFoundation.org]

Books to inspire financial well-being. Focusing on your well-being is an important part of life. Get a good night’s rest. Eat a healthy breakfast. Go for a jog, practice some yoga, forego that yummy cheeseburger in favor of a salad — all with the goal of being our best possible self. Extend that focus to your financial health with this list of recommended books. [New York Times]

 

Damian Kulash, lead singer of OK Go, talks about the insane amount of math involved in creating their video for “The One Moment.” (See the video he’s discussing here.)

This video is part of www.OKGoSandbox.org

 

Like a Rube Goldberg machine, federal tax swings down, state income tax pops up. Here’s why. [Politico]

13 ingenious facts about Rube Goldberg. Goldberg was likely the only Pulitzer Prize-winning cartoonist with a degree in engineering, a rap sheet for refereeing a street fight in Harlem, and a “Three Stooges” screenplay under his belt. [Mental Floss]

 

His inexhaustible reservoir of elaborate contraptions that mutated simple tasks into madcap feats of ingenuity made Rube Goldberg rich and famous. But he was also an all-around cartoon man and artist. (New York Times)

 

ICYMI: A behind the scenes look at the design and building of the Goldberg apparatus for OK Go’s music video for “This Too Shall Pass.” [Pehr Hovey]

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.