Year-End Tax Planning, a New Government and a Chance at Reform? – November 17, 2016 by Tracy Monroe

It’s time for private company owners to begin year-end planning to take advantage of any and all tax opportunities still available. This year is different in a couple of striking ways. We have certainty surrounding popular tax provisions thanks to the Protecting Americans from Tax Hikes Act (PATH Act), but we have the uncertainty of a new president elect, an all-Republican government for the first time since 2004-2006 and a speaker of the house with tax reform at the top of his list. So what do we plan for? Where do we go from here?
 
Optimistically looking ahead, the thought is that we may have a recipe for real tax reform. President-elect Trump’s plan is to grow the economy 4% per year and create 25 million new jobs by implementing massive tax cuts and simplifying the tax code. Specifically, his proposed Middle Class Tax Relief and Simplification Act aims to:

  • Implement tax cut of 35% for those married with children

  • Simplify to three tax brackets (down from seven): 12%, 25% and 33%

  • Simplify and increase the standard deduction for individuals and married filing jointly: $15,000 and $30,000, respectively

  • Limit certain itemized deductions

  • Leave capital gains and qualified dividends as is

  • Repeal of net investment income (NII) tax

  • Repeal of estate tax but tax appreciation over $10 million

  • Eliminate alternative minimum tax (AMT)

  • Reduce business tax rate to 15%, including an opportunity for owners of flow through entities to elect to be taxed at 15% on any profits left in the business

  • In consideration of the lower corporate rate, eliminate certain unspecified corporate deductions, except for R&D

  • Increase Section 179 expensing from $500,000 to $1 million

  • Repatriate offshore funds at a reduced rate

Interestingly, many of President-elect Trump’s views mirror the Republican blueprint for tax reform set forth earlier this year in the document called “A Better Way.” The question becomes, if all of the above provisions in fact pass, will it happen early enough in 2017 to be retroactive back to January 1, 2017? Time will tell.
 
Dealing in the here and now, our general guidance is, to the extent possible, to accelerate deductions and defer income. Specifically, the information below highlights more detailed planning opportunities that are available before the end of this year.

The PATH Act

On December 18, 2015, President Obama signed the Protecting Americans from Tax Hikes Act (PATH). The Act extended key tax provisions for multiple years and made others permanent. So for the first time in years we actually know the tax rules and can plan at year-end without speculating, at least in the areas covered by the Act, as outlined below.
 
Section 179 expensing:

  • Pre PATH Act the limit for Section 179 expensing was $25,000 and started to phase out at 200,000 of additions

  • PATH Act

    • Permanently sets the limit at $500,000 and phasing out at $2 million of additions

    • Made permanent the 179 expensing of qualified real property and removed the $250,000 cap related to this category

    • Ability to revoke election on amended return is made permanent

    • Remember the limits are tested at the entity and the individual level and also limits to active trade or business

Bonus Depreciation:

  • The Act extends bonus depreciation through a phase down schedule through 2019

    • 50% - 2015-2017

    • 40% - 2018

    • 30% - 2019

  • New category of property qualifying for bonus Qualified Improvement Property

    • Starting in 2016

    • Nonresidential real property qualifying for bonus regardless of recovery period

    • Defined as improvements to interior of building after first placed in service, not to enlarge, elevator or escalator or internal structural framework

R&D Credit:

  • Made permanent!!!

  • There were some additional benefits added as well:

    • Starting in 2016 small businesses (less than $50 million gross receipts) can claim the credit against AMT

    • Also starting in 2016 some start-ups can claim the credit against payroll taxes

  • Remember Ohio also has an R&D credit against CAT.      

Surface Transportation Act of 2015

An 11th hour temporary extension of federal highway and transportation spending is partially paid for by new tax compliance requirements and requires the following tax return deadlines for return years beginning after December 31, 2015:

  • Partnerships due 2 ½ months after year-end (March 15 for calendar year partnerships, automatic six month extension)

  • Corporations (except for June 30 year-ends) due 3 ½ months after year-end (April 15 for calendar year C Corporations). Most C Corps will receive a six-month extension, except for calendar year, which will only get a five-month extension until September 15.

  • FBAR now due April 15 (but can be extended)

  • Trust returns get a 5 ½ month extension and are ultimately due September 30

Partnership Audit Changes        

  • The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is repealed starting in 2017

  • Impacted partnerships will pay the tax at entity level unless the tax matters partner (TMP) elects out

  • Should be addressed in all partnership agreements

Ohio Small Business Deduction

Another big planning opportunity worth mentioning if you own a small business is the Ohio Small Business deduction. This has been increased to 75% of qualifying income for 2015 and 100% for 2016. Any additional income above is taxed at a special 3% business income rate.
 
The end of the year will be here before you know it. Talk soon with your tax advisor to make sure you are taking advantage of all of the provisions applicable to your situation.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.