Updates You Should Know About
Estate and Gift Tax Planning
The long-feared regulations that threatened to preclude the use of discounts, for lack of control and lack of marketability when valuing transfers of ownership interests in family-owned businesses, have been withdrawn by the IRS entirely. This remains a useful tool to maximize the transfer of assets within the current exemption limitations.
The proposed doubling of the lifetime exemption will open up even greater possibilities for family legacy planning.
Action Items
- If you have been putting off estate planning, or need to review your existing plan, please contact us to discuss how you can make transfers in the most tax-efficient manner.
- Regardless of proposed changes, consider making gifts to take advantage of the annual gift exclusion of $14,000 per person. The IRS recently announced that the exclusion would increase to $15,000 starting in 2018. This is the first such adjustment in several years.
- In addition to the annual gift exclusion, the per person lifetime exemption increased to $5.49 million in 2017 and would increase to $5.6 million in 2018, before any changes related to proposed tax reform legislation.
New Partnership Audit Rules
Our partnership clients, as well as those who are partners in partnerships, must consider the sweeping and significant changes to the partnership audit rules that will take effect on January 1, 2018. Beginning with 2018 tax returns partnerships will annually designate a Partnership Representative, replacing the Tax Matters Partner under the current audit regime. This representative will have much broader powers, including elections that impact how tax adjustments will be made and which partners will be responsible for paying additional tax.
Visit our website for more details on the new rules.
Expensing and Timing of Capital Expenditures
Items acquired for use in a trade or business that have a useful life greater than one year have historically been required to be capitalized and depreciated, mirroring the gradual decline in value that is experienced in an economic sense. Over the last few years, major changes have occurred in the tax law to make expenditures on capital assets very attractive from a tax standpoint. Keep in mind that future tax legislation may provide an even greater benefit. When considering purchases before year-end, you should consider these federal tax incentives:
De Minimis Safe Harbor Election
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Expense items up to $2,500/each ($5,000 for audited companies)
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Section 179 Expensing
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Up to $510,000 for 2017, personal and qualified real property; now applies to portable heating and AC units
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50% Bonus Depreciation
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New personal and qualified real property
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15-yr Depreciation, Qualified Real Property
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Retail, restaurant and leasehold improvements
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Action Items
- If you are planning to make capital expenditures in 2018, there are several factors to consider in determining whether it would be wise to accelerate the expenditures to obtain a 2017 tax benefit. For some, a better alternative may be to delay until 2018, with the hope that new tax legislation would yield a greater benefit, depending on the type of property and your particular facts. If significant acquisitions are planned in the next several years, please contact us to help you plan the timing to achieve the maximum tax benefit.
- Bonus depreciation is currently scheduled to decrease from 50% in 2017 to 40% in 2018 and 30% in 2019. Proposed tax legislation may impact bonus depreciation rules.
- Establish and document your capitalization policy to ensure the benefit of the De Minimis Safe Harbor election.
- Consider securing a Cost Segregation Study which may allow a taxpayer to accelerate depreciation on a portion of a commercial or residential rental property from 39 or 27.5 years to 3, 5, 7 or 15 years. This benefit is based on breaking out components such as special electrical, plumbing, ventilation, machinery foundations, loading docks, and hardscape and landscape.
Research Credit
While this was news last year, we want to remind you again because it remains a valuable tax benefit to consider. At the end of 2015, Congress permanently extended the credit for increasing research activities. Importantly, this credit can now reduce AMT as well as regular tax for eligible small businesses. This may result in significant federal tax savings. A qualified small business can also elect to use the credit against its liability to pay FICA tax on its employees' wages, rather than as a credit against regular income tax or AMT. This may be especially useful in early years when a company is just starting up.
Action Items
- Consider whether any expenditures (wages, supplies or contract research), have been made to develop a new or improved component of your business, technological in nature, that might qualify for the credit.
Work Opportunity Tax Credit (WOTC)
The WOTC credit is a federal tax credit incentivizing employers to hire individuals of certain "target" groups who may have various barriers to employment. Depending on the specific target group, a qualified employee may generate credits up to a maximum of $9,600 per employee. At the end of 2015, the PATH (Protecting Americans from Tax Hikes) Act extended the program through December 2019. However, the proposed House Bill would repeal this credit.
Action Item
- Employers may consider pre-screening job applicants to determine if they are potential WOTC qualifiers. WOTC applications must be submitted to the agency within 28 days from the employee's start date, so it is critical to screen employees up front.
Empowerment Zone Employment Credit
The empowerment zone tax credit program is applicable to designated economically distressed areas in which businesses and individual residents (or employees) are located. The program was effective through December 31, 2016. However, unclaimed credits may still be claimed on an amended tax return assuming the tax year is not closed due to the statute of limitations.
Action Item
- Employers should evaluate whether their business operates in an empowerment zone to determine if they are eligible to receive such credits and would benefit from filing amended returns.
State and Local Tax
Doing Business in California
A business that is owned and operated entirely in California, and whose customers are all in California, generally incurs California tax on 100% of its federal taxable income, adjusted for certain federal/California tax law differences. Life is simple, albeit costly.
The "California Competes" program can provide businesses that apply to the state with various credits and other incentives for expanding California jobs and facilities. Partial sales tax exemptions are also available for certain manufacturing, processing, and research and development equipment purchases.
A business that is based in California but derives income from or has operations in other states must be concerned with how the business income is apportioned or allocated for tax purposes between California and other states. Even if all of the work is performed by a service business in California, when a customer in another state receives the benefit of the service, a share of the business income may need to be apportioned to the other state.
Happily, this may result in a reduced overall state tax liability, either for the entity or its non-California resident owners. The state of California boasts, in addition to spectacular weather, one of the highest income tax rates.
In an effort to increase consumer awareness of the obligation to report and remit use tax on sales tax free purchases from out-of-state vendors, the Franchise Tax Board will require an individual taxpayer to enter a number on the use tax line of the California personal income tax return. If the number is zero, California requires the individual taxpayer to indicate no use tax is owed or use tax has been remitted to the California Department of Tax and Fee Administration.
Action Item
- If you think your business may be eligible to benefit from state tax incentives and lower state tax rates, please contact us to make an appointment with one of our professionals who specialize in State and Local Tax issues.