Year-end tax planning for businesses will be challenging in 2017 due to uncertainty over the proposed Tax Cuts and Jobs Act. While it is difficult to forecast the impact of tax law changes that could be made, it is important to consider techniques that are available today. The topics addressed below provide planning ideas based on the tax law in effect as of the date of this publication.
Bonus Depreciation and Code Sec. 179 Expense Deductions
Fifty-percent bonus depreciation deduction is available through the 2017 tax year (the amount decreases to 40% in 2018 and 30% in 2019). Because this bonus depreciation can be elected on the 2017 return when it is filed in 2018, business owners do not have to make an immediate decision if they wish to use this accelerated method. Bonus depreciation is optional and businesses can elect not to use it – which may be appropriate in certain circumstances if deductions need to be spread more evenly over future years. What is important is that any qualifying property must be purchased and placed in service by the end of 2017 in order to be prepared to take advantage of this provision. Therefore, businesses should evaluate their equipment needs now and take action to acquire and place in service qualified property while there is still time.
Under Code Section 179 expensing rules for 2017, businesses can write off up to $510,000 in qualifying expenditures and would not have to reduce this amount unless total purchases of all equipment exceeds $2,030,000 this year. There is no proration of this deduction based upon the time of the year that the asset is placed in service. In other words, as long as the asset is truly placed in service by the year-end a last minute purchase of equipment will result in an immediate deduction under this provision. Please be aware that there are additional restrictions for cars and trucks.
Other Notable Business Tax Provisions
Credit for Increasing Research Activities - This credit was made permanent by the PATH Act of 2015. For qualifying small businesses, the credit can be used to offset payroll tax liabilities or alternative minimum tax.
Work Opportunity Credit - This credit is available through 2019.
Reduced Recognition Period for Built-In Gains - The recognition period for reporting built-in gains for S corporations is now 5 years.
Qualified Small Business Stock - Gain from the disposition of qualified small business stock may be excluded from taxable income.
A Note About the Proposed Tax Law Changes
Under the House version of the Tax Cuts and Jobs Act, business income would be taxed at the following rates:
- C Corporations - 20%
- Personal Service Corporations - 25%
- Pass-through income of a passive investor - 25%
- Pass-through income of an active investor - 30% of the income would be taxed at 25%; the remainder would be taxed at the individual's ordinary rates
Taxpayers should keep these possible tax rate changes in mind. If they have the option of deferring income into next year or accelerating deductions into the current year, this may prove advantageous. It is, however, too early to predict what, if any, tax law changes will eventually become law.
The professionals at MarksNelson are keeping abreast of the recent tax proposals and will keep you informed of any changes in the tax law. Please call your MarksNelson advisor at 816-743-7700 to discuss how to best plan for your business given the current and proposed tax laws.