2016 Year-End Tax Planning
Dear Clients and Friends:
As the end of the year approaches we want to point out to you some of the tax-related changes (including proposed changes) that you should take into consideration for your year-end tax and wealth preservation planning.  We hope this information is helpful as you begin to plan for year-end 2016. If you have any questions, please do not hesitate to contact your tax professional at HCVT.
NEWS YOU SHOULD KNOW
Post-Election Tax Reform
With the presidential election behind us, predictions abound for what changes may take place in the near future. Certain elements of tax reform included in President-elect Trump's tax plan and the GOP "Better Way" tax reform blueprint issued in June 2016 may have a chance of passing in early 2017. While resistance is anticipated from Democratic contingents in the House and Senate, we may see:
 
Individual
Rates
  • Reduced individual income tax rates, three brackets: 12%, 25% and 33%
  • Reduced capital gains tax rate to 16.5% maximum (GOP)
  • Reduced tax rate on interest income and dividend income to 16.5% maximum (GOP)
Deductions/Credits
  • Increased standard deduction
  • Elimination of itemized deductions except home mortgage interest and charitable contributions (GOP)
  • Cap on itemized deductions, $200,000 for married-joint filers; $100,000 for unmarried individuals (Trump)
  • Enhanced tax benefits for elder care and child care expenses (Trump)
  • Simplified tax benefits for education (GOP)
Wealth transfer
  • Repeal of the estate tax
  • Capital gains on property held until death and valued over $10 million would be subject to tax (Trump)
  • Disallowed contributions of appreciated assets to private charity (Trump)
Other
  • Elimination of Head of Household filing status and personal exemptions (Trump)
  • Repeal of Obamacare, including the 3.8% net investment income tax
  • Elimination of the individual alternative minimum tax ("AMT")
Business
Rates
  • Reduced corporate income tax rates, from 35% to 20% (GOP)/15% (Trump)
  • New tax rate for income from pass-through entities, 25% (GOP) /15% (Trump pre-election)
Deductions/Credits
  • Elimination of most tax preferences for corporate expenditures except for the research and development credit
  • Expensing of all cost of capital investments (GOP)
  • Business provision allowing interest expense deductible only against interest income, with any net interest expense carried forward and allowed as a deduction against net interest income in future years (GOP)
  • Increase of annual cap (to $1 million) on IRC Section 179 expensing of capital expenditures (Trump pre-election)
  • Manufacturers: election to expense all capital investments or deduct interest expense (Trump)
  • Increased tax credit for on-site childcare (Trump)
Other
  • Carried interest taxed as ordinary income (Trump)
  • Elimination of the corporate AMT
  • Net operating losses allowed to be carried forward indefinitely, while carry-back of net operating losses not allowed (GOP)
  • One-time tax on repatriation of foreign earnings, 10% (Trump), 8.75% (GOP)
Action Items
  • Proposed reduced individual income tax rates and repeal of the net investment income tax may strengthen the incentive for deferring income and capital gains into 2017. Accelerating capital losses may also be prudent.
  • Potential cap on, or elimination of, certain itemized deductions may strengthen the incentive for accelerating deductions into 2016. Bear in mind that the AMT, still applicable in 2016, may limit some of the tax advantage, but accelerating itemized deductions may still be worthwhile to reduce the net investment income tax.
  • Expanded opportunity for expensing of capital expenditures in the future may suggest a benefit from deferring capital expenditures into 2017. See also discussion below regarding current rules.
  • Proposed reduced tax rates for corporate and pass-through entity income suggests a benefit from deferring business income into 2017.
  • Timing the payment of any remaining 2016 state tax liability to maximize the federal tax benefit may be especially difficult this year, given the possibility of no AMT and/or no deduction after 2016.
Captive Insurance Companies, Disclosure Required
On November 1, 2016 the IRS issued Notice 2016-66 identifying certain transactions involving micro-captive insurance companies as "Transactions of Interest" that require disclosure.
 
Action Item
  • To the extent you, or a related party, directly or indirectly own a captive insurance company that has made an election under IRC Section 831(b) to be taxed only on taxable investment income, you may be required to file a Reportable Transaction Disclosure Statement with the IRS.
International Business
Debt-Equity Regulations
Treasury has recently finalized new debt versus equity regulations under IRC Section 385. These regulations provide new documentation requirements for debt instruments issued after December 31, 2017 in order to properly characterize a loan as debt for tax purposes. The regulations also provide certain situations where a debt instrument issued after April 4, 2016 will be re-characterized as equity, which would eliminate interest deductions. This re-characterization will apply to tax years ending after January 18, 2017.

FATCA
Required reporting of foreign financial assets, including foreign bank accounts, has now been extended to certain domestic entities. The reporting was previously limited to individual taxpayers. For tax years beginning after December 31, 2015, form 8938 will be filed with the entity's income tax return. Read more about this and other important elements of required foreign reporting located here on our website .

Action Item
  • While international tax matters have not been highlighted in tax reform proposals, Treasury is quite focused on them. Please contact us if you would like to meet with one of our international tax specialists to review your particular situation. 
Expiring Tax Incentives
Several popular tax incentives were not permanently extended by the PATH Act in late 2015. Instead, they were extended for only two years unless addressed again by Congress. We will keep watching with particular interest for these provisions that are scheduled to expire at the end of 2016:
  • Above the line (for computing Adjusted Gross Income) deduction for qualified college tuition
  • Deduction of mortgage insurance premiums as interest expense
  • Numerous energy incentives, including IRC Section 25C and 25D Energy Property credits for residential
  • Up to $2 million exclusion from income for discharge of debt on principal residence - if not extended, unfortunate tax consequences may result from a foreclosure, short sale or loan modification with respect to "underwater" properties
Action Item
  • California does not conform to the federal exclusion for discharge of indebtedness on a principal residence. Nevertheless, it may be wise to conclude negotiation and document an agreement with the lender before the end of the year in order to secure the federal tax benefit.
Estate and Gift Tax Planning
An important tool in planning for the transfer of wealth among family members is likely to be eliminated very soon. As we wrote to you in August, the IRS proposed regulations that would preclude the use of discounts for lack of control and lack of marketability when valuing transfers of ownership interests in family-owned businesses. The regulations will be effective when finalized, in early 2017 or sooner.
 
Proposed tax reform to repeal the estate tax may be a significant mitigating factor, however, neither the Trump tax plan nor the GOP plan have indicated whether life-time gifts will continue to be subject to tax.
 
Trump's tax plan does away with the step-up in basis of assets held at death for estates in excess of $10 million, shifting an income tax burden to heirs along with appreciated assets. This may be a new piece of the puzzle for family wealth tax planning.
 
Another feature of the Trump plan would "disallow" the contribution of appreciated assets to private charity. No further detail has been released regarding this proposal.
 
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.
  • Consider making planned contributions of appreciated property to private foundations before the end of 2016.
  • Regardless of proposed changes, consider making gifts to take advantage of the annual gift exclusion of $14,000 per person.
Changes to Filing Deadlines
We alerted you to this last year but now the time has come. Like city traffic patterns immediately after the change to or from Daylight Savings Time, this next tax filing season may be a little chaotic. You can see an expanded list of the revised due dates located here on our website, but key dates that have "sprung forward" include:

S Corporations
Extended due date for CA return accelerated one month, Sept. 15, 2017
Partnerships/LLCs treated as partnerships
Original due date for returns accelerated one month, March 15, 2017
LLCs treated as disregarded entities, owned by pass-through entities
Original and extended due dates for returns accelerated one month, March 15, 2017 and Sept. 15, 2017

Trusts and Estates (Form 1041 filers) Extended federal due dates for returns accelerated half month, October 2, 2017   
All Businesses Due dates for filing forms W-2, W-3 and 1099-MISC (non-employee comp only) with the IRS accelerated one month, Jan. 31, 2017
Individuals
Due date for filing FinCEN Report 114 (FBAR) accelerated 2 ½ months, April 15, 2017 extension to Oct. 15, 2017

Action Items
  • Partnerships in particular will want to hit the ground running to close their books early in the New Year, especially if they are not planning to request an extension.
  • Pay attention to the earlier filing deadline for W-2s and 1099s for non-employee compensation to avoid penalties.

THINGS YOU MIGHT LIKE TO KNOW
Expensing and Timing of Capital Expenditures

Items purchased to be used 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 reform may provide an even greater benefit. When considering purchases before year-end, you will want to remember these federal tax incentives:

De Minimis Safe Harbor Election
Expense items up to $2,500/ea ($5,000 for audited companies)
Section 179 Expensing
Up to $500,000 for 2016, personal and qualified real property
Section 179 Expensing
Now applies to portable heating and AC units
50% Bonus Depreciation
New personal and qualified real property
15-yr Depreciation, qualified real property
Retail, restaurant and leasehold improvements
Safe Harbor Retail/Restaurant Refresh
75% current deduction, accounting method change required

Action Items
  • If you are planning to make capital expenditures in 2017, there are several factors to consider in determining whether it would be wise to accelerate the expenditures to obtain a 2016 tax benefit. A better alternative may be to delay until 2017, with the hope that the tax reform proposal will 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.
  • Establish and document your capitalization policy to ensure the benefit of the De Minimis Safe Harbor.
  • Consider securing a Cost Segregation Study, which allows a taxpayer to accelerate depreciation on a portion of a commercial or 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, hardscape and landscape. A change in accounting method is required.
Research Credits
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 a 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 Item  
  • 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.
State and Local Tax
Doing Business in California and/or Other States
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 and processing 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.
 
Significant developments in the past few years impact the amount of income taxed within or outside the state of California, including the recent decision by the US Supreme Court not to review the California Supreme Court decision in Gillette. 
Shining Light on the Nevada Commerce Tax
Effective July 1, 2015, Nevada imposes an annual commerce tax measured by gross revenue on each business entity engaged in business within the State. Although a business entity engaged in business in Nevada may have a filing requirement, it will not be subject to tax unless its Nevada source revenue exceeds $4,000,000. A few other notable features of the commerce tax include:  
  • The commerce tax has a taxable fiscal year of a 12-month period beginning July 1st and ending June 30th  
  • Tax return and payment are generally due by August 15
  • Tax rate varies form 0.051% to 0.331% 
  • A grace period for the filing of the fiscal year ended June 30, 2016, and payment of any related tax, has been provided until February 15, 2017. No interest or penalty will be assessed if the Nevada Commerce Tax Return is filed and tax payment is made on or before February 15, 2017.
Action Item
  • Multi-state businesses should consider whether there may be planning opportunities available to reduce future state tax liability or, in some cases, generate potential refunds for prior open tax years. Please contact us if you would like us to review your particular situation.
BASIC TOOLS OF YEAR-END TAX PLANNING
Tax Planning Strategies
A number of tax planning strategies should be considered with your year-end analysis. Strategies involving the acceleration of expenses and/or the deferral of income can often provide an immediate cash tax benefit. Capital gains planning (including capital loss harvesting) and contributions to tax-deferred accounts, such as retirement savings and flexible spending accounts play a role in a successful year-end tax strategy. Testing your current tax posture for the AMT liability should also be an integral part of every year-end review, especially when deciding when to pay any balance due on your state tax liability. You can find a list of suggestions located here on our website.

Crunch the Numbers
A summary of tax rates and important limitations are located here on our website . As always, we are here for you to answer questions and assist in projecting your 2016 tax liability.
 
Action Items
  • For any charitable contributions of $250 or greater, obtain a tax acknowledgement letter from the charity that clearly states "no goods or services were given in exchange for the donation", or reflects the amount of such goods and services. The IRS routinely disallows contributions when the taxpayer does not have a letter in hand at the date of filing the tax return. A qualified appraisal may also be required for non-cash contributions exceeding $5,000.
  • A taxpayer claiming the American Opportunity Credit for qualified educational expenses must report the employer identification number of the college/university on the return where the credit is claimed. Be sure to retain any forms 1098-T that you receive.
HCVT
(714) 361-7658
[email protected]
http://www.hcvt.com