Final And Proposed Regulations On New 100% Depreciation Released By IRS

WASHINGTON — The Treasury Department and the Internal Revenue Service today released final regulations (PDF) and additional proposed regulations (PDF) under section 168(k) of the Internal Revenue Code on the new 100% additional first year depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service by the business.

The regulations released today on IRS.gov have been submitted to the Federal Register and may vary slightly from the published documents due to minor editorial changes. The documents published in the Federal Register will be the official documents.

The final regulations finalize the proposed regulations issued in August 2018 which implement several provisions included in the Tax Cuts and Jobs Act (TCJA). The proposed regulations contain new provisions not addressed previously.

The 100% additional first year depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.

The deduction applies to qualifying property acquired and placed in service after September 27, 2017. The final regulations provide clarifying guidance on the requirements that must be met for property to qualify for the deduction, including used property. The final regulations also provide rules for qualified film, television and live theatrical productions.

Additionally, in the proposed regulations, the Treasury Department and IRS propose rules regarding (i) certain property not eligible for the additional first year depreciation deduction, (ii) a de minimis use rule for determining whether a taxpayer previously used property; (iii) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (iv) other aspects not dealt with in the previous August 2018 proposed regulations. The proposed regulations also withdraw and repropose rules regarding application of the used property acquisition requirements (i) to consolidated groups, and (ii) to a series of related transactions.

For details on claiming the deduction or electing out of claiming it, see the final regulations or the instructions to Form 4562, Depreciation and Amortization (Including Information on Listed Property). For tax years that include September 28, 2017, see Rev. Proc. 2019-33 (PDF) for further information about making a late election or revoking an election.

Taxpayers who elect out of the 100% depreciation deduction must do so on a timely-filed return. Those who have already timely filed their 2018 return and did not elect out but still wish to do so have six months from the original deadline, without an extension, to file an amended return.

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

New Lease Accounting Standard

Although it is a difficult business climate right now, Neikirk, Mahoney & Smith are dedicated to bringing up-to-date news focused on the accounting sector to ease your hardships, such as with new standards such as the new lease accounting standard being implemented. LeaseQuery took a survey and the results were considerably under anticipated: 67 percent reported actual difficulty which nearly doubled 37 percent whom anticipated difficulty.

The Financial Accounting Standards Board has proposed a postponed deadline to take effective January 2021, which would give businesses one-year extension to implement the leases standard. Accounting Today reports, “The LeaseQuery survey found that over half of public companies (54 percent) have already completed their transition to the new standard, seven months after the deadline. But only 5 percent of private companies have completed the transition, with 58 percent of the companies polled saying they’re still in the early stages of assessing their implementation plans.”

Even if the delay is approved, both public and private companies alike need to proceed immediately with transition. LeaseQuery CEO George Azih comments, “While organizations await the FASB decision, one thing is clear: a delay is just a false sense of security. Transitioning to the new standard is a complex, time-consuming process, even when you have the best team and tools on your side. Private companies, nonprofits and government organization should continue to move transition plans forward, and with haste.”

More about the hardships of this transition can be found at accoutingtoday.com or to see the full results of the survey, visit leasequery.com.

New opportunities for year-end tax planning abound with new tax law

Taxpayers have now had close to a year to evaluate the new provisions of the Tax Cuts and Jobs Act. However, they have had much less time to look at proposed regulations interpreting those provisions and are still awaiting some proposed regulations and any final regulations.

There have been suggestions that the 2019 tax filing season might be delayed due to the inability of the Internal Revenue Service to process all of the changes in time. Even with a lot of questions remaining, taxpayers should be thinking about taking steps prior to year-end to take advantage of the new provisions in the law.

Increased standard deduction and reduced itemized deductions.

With the standard deduction nearly doubling to $12,000 for single filers and $24,000 for joint filers, while a number of common itemized deductions have been reduced or eliminated, particularly the state and local tax deduction, the interest deduction, the casualty loss deduction and the miscellaneous itemized deductions over the 2-percent-of-adjusted-gross-income floor, many more taxpayers are projected to be better off with the standard deduction than the itemized deduction. Already in prior years, about two-thirds of taxpayers claimed the standard deduction. Now that percentage is expected to increase to more than three-fourths of all taxpayers. Many more taxpayers in 2018 may no longer receive a tax benefit from itemized deductions that they had received in the past.

Taxpayers must compare not only the new standard deduction to the amount of itemized deductions to which they were entitled in the past but also to the amount of itemized deductions to which they expect to be entitled in 2018 and beyond.

Taxpayers who regularly claimed itemized deductions in the past may now want to bunch those deductions into one year and claim the standard deduction in the other year. One itemized deduction that is easily bunched is charitable contributions. A taxpayer can still give annually to their favorite charities by making the donations in January and December of one year while skipping the following year or through the use of donor-advised funds, where the donation is claimed in one year while the distributions to charities can be spread over several years.

If the standard deduction is now still a better option with the level of charitable giving, taxpayers over age 70-½ can consider making the charitable contributions from an IRA, offsetting required minimum distributions that otherwise would have been required to be taken into income.

Taxpayers with line of credit interest should consider documenting the cost of home improvements that would support claiming at least a portion of that interest as qualified mortgage interest.

With respect to the $10,000 limit on the state and local tax deduction, taxpayers with real estate taxes should consider whether it is possible to allocate any real estate taxes to a business tax return. While some higher-tax states have adopted laws to help taxpayers preserve their deductions through charitable contributions to state charities or through payroll deductions, the IRS is attacking those approaches and it is not clear that such approaches will hold up.

Withholding

The Tax Cuts and Jobs Act was enacted so late in 2017 that the new 2018 withholding tables were not required to be put into effect until March 2018, creating a potential over-withholding situation for some taxpayers.

While the new withholding tables adjusted for lower tax rates, the increased standard deduction, and the elimination of exemptions, those tables did not adjust for the loss of itemized deductions. This has created the potential for under-withholding in 2018 for millions of taxpayers unless they have adjusted their estimated tax payments or withholding accordingly.

Taxpayers should review their estimated tax payments and withholding as soon as possible to adjust for the new reality. While increasing estimated tax payments late in the year will provide only a benefit based on the date they were paid, increasing withholding will provide a benefit as if it had been paid throughout the year. Taxpayers facing possible under-withholding should therefore consider revising their Form W-4s for the remainder of the year to add a dollar amount to compensate for any anticipated under-withholding.

The 20 percent deduction for pass-through businesses

By this point in the year, most pass-through business owners are aware of and excited about the new 20 percent deduction available to them. However, even with proposed regulations released, there remains a lot of uncertainty about how to take maximum advantage of the deduction. Does my activity qualify as a trade or business? What is my qualified business income after considering investment income and compensation-like income? Am I a specified service trade or business or have some level of specified service trade or business income? What are the W-2 wages of the business? What is the qualified property of the business? Would I be better off aggregating businesses or breaking up businesses?

The issues can be complicated and the answers in many instances remain unclear. Pass-through business owners should be working with their trusted tax advisor to develop the best strategy to maximize the deduction. Also complicating planning is that the 20 percent deduction, like many of the individual tax provisions in the new law, expires after 2025, which must be considered in any significant restructuring.

Some taxpayers may elect to do nothing until the answers to some of these issues become clear, perhaps in final regulations or later. Other taxpayers may, however, be able to take steps for the remainder of the year, with expert advice, to increase their deduction for 2018.

The new partnership audit rules

The new partnership audit rules are effective for 2018. These require designation of a partnership representative, smaller partnerships considering electing out of the rules, or partnerships pushing out liability for audit adjustments under the new rules from the partnership to the partners. These actions should be taken as soon as possible before an IRS audit materializes, remembering that the audit rules are designed to increase the number of IRS audits of partnerships.

Child Tax Credit and Social Security numbers

The Tax Cuts and Jobs Act now requires any child for whom the new higher Child Tax Credit is claimed to have a Social Security number. For the refundable portion of the Child Tax Credit, the Social Security number must be issued to a U.S. citizen or authorize the individual to work in the U.S.

A Taxpayer Identification Number is no longer sufficient; however, it is sufficient for the new $500 credit for a qualifying dependent. The Social Security number can be issued up until the filing date for the tax return.

529 plans and ABLE accounts

Look at new options to pay elementary and secondary tuition from 529 plans and new opportunities to provide increased funding for ABLE accounts from 529 plans or the beneficiary’s income. The attractiveness of ABLE accounts still suffers, however, from the fact that the funds revert to the state on the death of the beneficiary. Special needs trusts may remain a more attractive alternative.

Do the usual

In addition to some of the special issues for 2018, taxpayers should still look at the usual year-end planning:

1. Review your investment portfolio to realize gains and losses before year-end. From a tax perspective, the ideal year-end situation is a $3,000 net capital loss that can be offset against more highly taxed ordinary income. However, it must always be considered whether it is better to realize capital losses to offset capital gains in 2018, taxed at a maximum rate of 20 percent, or to postpone those losses into future years when, if there are no capital gains, they might offset ordinary income that would otherwise be taxed as high as 37 percent.
2. Maximize contributions to 401(k) plans and 529 plans. Take required minimum distributions if the taxpayer reached age 70-½ prior to 2018.
3. If taxpayers have exercised incentive stock options during 2018, consider selling the stock before year-end if the values have significantly declined since the exercise date. Otherwise, the taxpayer could be hit with a large Alternative Minimum Tax that it might be difficult to pay.

The TCJA did include a provision permitting non-highly-compensated employees to make an election to defer tax on stock options for up to five years.

Summary

The many changes in the Tax Cuts and Jobs Act have created a number of planning opportunities for 2018 tax returns. There remain a number of outstanding issues for which guidance is still being sought from the IRS, and the IRS will continue to issue additional guidance between now and year-end.

Tax advisors and their clients should monitor these developments as they occur and take actions before year-end that will prove helpful in taking full advantage of the provisions of the new law.

Source: accountingtoday.com Written by: M. Luscombe

Revenue recognition standard could affect bank loans to small businesses

The new revenue recognition standard doesn’t only affect publicly traded corporations and large privately held companies. It could have an impact on small businesses, particularly if they hope to obtain bank loans next year.

Some small businesses may find that because of the standard that takes effect for private companies next year, they will need to recognize revenue later than before. That means they could need larger loans than previously planned or they could fall short on loan repayments. While some financial institutions might be willing to amend the terms of a loan to increase lending limits or adjust payments, others might not be as flexible. For many small businesses, falling short on cash because of inadequate loans could have major consequences for growth, including the ability to pay their suppliers, as well as offer performance-based incentives such as bonuses and hire new employees.

“Private companies are starting to realize is it’s not business as usual,” said Mark Davis, national managing partner of Deloitte Private Enterprises. “When you’re dealing with a bank or a lender, whether it’s a commercial bank or a private lender, they’re in the business of looking to invest their dollars through a loan. They generally have confidence in what they’re receiving, and they build that level of integrity and confidence by their interactions with the company. The standard is very complicated, and one of the things that we recommend to our clients that either have a loan or plan to get a loan is that the banks are going to be looking for a level of confidence and comfort in what they’re getting from the company. They want to see that things are under control. They want to see that they have this standard understood, and they can explain to the bank or the lender what the impacts would be, whether that be on the current loan that they have or on a potential loan that they would look to get.”

Davis believes banks are going to want to know how their small business clients are implementing the revenue recognition standard.

“I think the bank will certainly have an interest in understanding how a company is dealing with it, whether they have it under control, whether they’ve evaluated it, whether they’ve hired somebody to do it for them,” he said. “If you’re looking to obtain a loan, I think that would be part of the conversation. They’re relying on what you give them from the financial statements. Many loans have financial covenants. That’s where the nuances of the standard can have an impact. The issue of covenants and whether you’re in compliance with them currently and will remain in compliance with them after the new standard is a big issue if you have a loan today. If you’re looking to enter into a new loan with somebody, it’s the same thing — how will those covenants be impacted by the new standard?”

Many banks will soon be dealing with another new accounting standard on current expected credit losses, also known as the CECL standard, but the revenue recognition standard is more likely to have an impact on small businesses that rely on bank loans. While small businesses like a mom-and-pop corner grocery probably won’t have to worry much about accounting standards, startup businesses in the technology industry could be facing some concerns.

“I think the standard affects companies more in certain industries than others, and certain businesses than others, like technology or media companies or companies that have long-term contracts or long-term construction contracts,” said Davis. “They’ll be affected whether they’re public or private. We’ve seen in the retail consumer business space much less of an impact in that space, but it really depends on the industry. Each industry has different issues that are affected by the standard. It really has less to do with public vs. private, big vs. small, and I think that’s why private companies have tended to wait to deal with it, because they’re of the view that it probably applies to public companies and may not affect them, when it reality it has nothing to do with public or private. It has more to do with the type of company.”

Startup companies that hope to go public eventually will need to be sure they can secure funding and their revenue recognition accounting is in order.

“If you look at a technology company that hypothetically is an emerging company looking to go public in a couple of years, and they do, say, software as service, hypothetically it could have an impact,” said Davis. “Let’s say they were recording revenue ratably over a period of time, over the life of the contract. Now they might have a different outcome. Let’s say someone had a $10 million two-year contract with a customer, and they were recording that revenue ratably over a two-year period. In each year they would have $5 million of revenue reflected in their financial statements. Let’s say they had covenants that were tied to that. Let’s say they had a revenue covenant in their debt agreement, and let’s say they had an EBITDA [earnings before interest, taxes, depreciation and amortization] covenant, both tied to that expectation of revenue being earned evenly. Now all of a sudden for whatever reason, let’s say a majority of that number doesn’t get recorded until that contract ends, so they may not achieve the revenue target and they may not achieve the EBITDA target, and they would have to go back to the bank in early ’19 to say, ‘We may not make our covenant.’ I would say a significant percentage of the time, a bank would say, ‘Yeah, we expected that. Let’s take a look at it and we’ll adjust the covenant and it won’t be a problem.’”

Deloitte advises clients to be aware of the potential things that could go wrong with loans and debt covenants for small businesses.

“I tell clients that banks go through changes. They go through oversight changes, they go through leadership changes, they go in and out of different industries at different times, and they also look at a company when they get a chance to look,” said Davis. “Let’s say your business isn’t doing as well today as it was when you first got the loan. Or they say, ‘We’re not interested in that space any longer. We’re going to go in a different direction.’ All of a sudden, getting that covenant waived could get more complicated, and you might not get that covenant waived. We’ve been alerting our clients to that issue and why it’s become so important, regardless of whether it’s public or private.”

The new standard could also have an impact on whether companies can provide bonuses to employees and hire new workers.

“Cash is driven by the payment schedule in the contract, so you could potentially be getting the cash all throughout the contract, but with revenue recognition you don’t get to record it in the same manner,” said Davis. “If you go back to the example I gave you, maybe now half of the revenue would have to be deferred and recorded when the contract ends. So you’ve got the cash. It’s not a cash flow problem. It’s not a cash issue. It’s a financial statement, and it’s a reflection of the strength of the business from an income statement standpoint. So could it affect bonuses? Yes.”

The revenue recognition standard is a complex one for many small businesses to handle, and many of them will be turning to their accountants for help. “Another thing we’ve told people as to why this standard is more complicated than others is it’s a very far-reaching standard,” said Davis. “It goes outside of finance. It could touch human resources. It could touch your sales force. If your sales force is used to getting bonuses based on revenue earnings, and if now they have to wait two years to get their commission, a salesperson could be upset about that. There are so many facets that get impacted because lots of these things are tied to the financial statements: revenue or EBITDA. Bonuses could change. It’s really the timing of these things, the timing of when a bonus would occur. It could change. It’s not that the person will never get it. It’s that they may not get it the way they’ve been used to getting it. That gets people upset. Generally they don’t necessarily understand.”

Source: accountingtoday.com  Written by: M. Cohn

What are clients’ biggest questions about reform?

Tax reform’s dizzying array of changes seemed to confuse preparers, lawmakers and the IRS alike. But amid all the new laws, which one stands out to clients?

As with the Tax Cuts and Jobs Act itself, answers can vary widely.

“Many are concerned with the non-deductibility of unreimbursed employee business expenses, along with other expenses that were subject to the 2 percent [AGI rule],” said Chris Hardy, an Enrolled Agent at Georgia-based Paramount Tax and Accounting.

“For individuals, it’s the lack of exemptions and particularly how that will affect taxpayers such as college students whom parents would normally claim but [who] still need to file their own return,” said EA Laurie Ziegler at Sass Accounting in Saukville, Wisconsin.

Burbank, California, CPA Brian Stoner finds clients chiefly concerned about two things. First, SALT limitations: “In California, almost every homeowner has way, way over $10,000 in real estate, state income taxes and personal property taxes,” he said.

And second, personal exemptions: “Especially if they have two or three dependents,” Stoner said, “but many will qualify for the Child Tax Credit because of a much higher income limitation or family credit on a lot of the dependents – so I have some good news for them.”

Client professions key

Many of Stoner’s clients are also in entertainment, paid by some of the large entertainment payroll companies. “Some are going to lose $30,000 to $60,000 in itemized [deductions] because unreimbursed employee business expenses are no longer deductible, plus financial advisor and tax preparation fees are also not deductible,” he said. “Many entertainment clients are looking into forming corporations as production companies to continue to deduct many of these expenses.

New York EA Phyllis Jo Kubey likewise has many clients in the performing arts. “While they’re freelancers, because of union contracts with many venues they’re treated as employees for some work, receiving a W-2, and as independent contractors, receiving a 1099-Misc for other work,” Kubey said. “Since they’re doing the same thing, they’re tremendously confused about what’s an employee business expense – no longer deductible under TCJA – and what’s a business expense related to their [self-employed] income [that is] deductible under TCJA.”

Another wrinkle: Some clients think that they can deduct nothing anymore. “I have to keep reminding them what is and isn’t deductible for 2018,” Kubey said. “My clients are also confused, even with detailed explanations and 2018 tax projection worksheets I’ve provided, about whether they’ll still itemize deductions.” In New York City, where real estate carrying costs are dizzying, “even with the SALT limitation many will still itemize their deductions on what used to be Schedule A,” Kubey said.

Define ‘specified’…

Another major confusion for clients remains one pivotal detail of reform’s pass-through income deduction. “Lots of clients have expressed concern and confusion with the new 199A deduction,” said Jake Alexander, an EA and owner of Alexander Financial in Largo, Florida. “There’s been a lot of confusion for them establishing who qualifies for it, what it means if they do and how it will affect them.”

“Certainly for my small businesses, it’s 199A,” Ziegler added. “There are so many questions about how it works and who it includes, especially in light of the exclusion for certain professions.”

Recently proposed regs do attempt to narrow the scope of service businesses ineligible for the deduction. “Ineligible consulting business” has been limited to businesses that provide advice and counsel, for example. Experts say tricky areas remain when an activity rises to the level of a trade or business, and possibly banking when banks provide multiple services beyond lending and paying interest on deposits.

John Dundon, an EA and president of Taxpayer Advocacy Services in Englewood, Colorado, sees the most questions over the definition of a “specified service, trade or business,” which is key to the new pass-through income deduction. “The proposed regulations are less than fully clear, and many industries are not addressed or incompletely addressed,” he said. “As an example, the practice of law is deemed to be an SSTB, but what if all the lawyer did was trust administration, work that does not require a law degree? Is that lawyer performing duties [that are] an SSTB? Many think not.”

Post-reform, no matter their questions, “clients will need a lot of hand-holding from their tax pros as we go into the 2019 filing season for 2018 returns,” Kubey said.

IRS offers guidance on meals and entertainment deduction after tax reform

The Internal Revenue Service released guidance Wednesday on the business expense deduction for meals and entertainment in the wake of the Tax Cuts and Jobs Act, which was supposed to eliminate deductions for expenses pertaining to activities generally considered entertainment, amusement or recreation.

The IRS said taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the business) is present at the meal, and the food or beverages aren’t considered to be “lavish or extravagant.” The meals can involve a current or potential business customer, client, consultant or a similar business contact. Food and beverages provided during entertainment events won’t be considered entertainment if they’re bought separately from the event.

Before 2018, a business was able to deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if they’re incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. That changed, however, with the passage of the tax code overhaul last December.

Section 274 of the tax code now generally disallows a deduction for expenses with respect to entertainment, amusement or recreation after passage of the new tax law. However, the Tax Cuts and Jobs Act doesn’t specifically address the deductibility of expenses for business meals.

The Treasury Department and the IRS plan to publish proposed regulations that will clarify exactly when business meal expenses are deductible and what constitutes entertainment. Until those proposed regulations take effect, taxpayers can rely on guidance in Notice 2018-76, which the IRS issued Wednesday in conjunction with the announcement.

Source: accountingtoday.com Written by: M Cohn

How to improve upon last year's tax reform

Although the White House now acknowledges that Republicans will not be able to pass a second round of tax cuts before the midterm elections, House Speaker Paul Ryan has promised a vote on so-called Tax Reform 2.0 before then. But even if the politics are unsettled, the policy shouldn’t be.

Whether Tax Reform 2.0 is the first salvo in a protracted battle over tax policy or just an election-year gambit, this is a debate that cannot be avoided. New legislation will have to be passed to make many aspects of last year’s Tax Cuts and Jobs Act permanent. (The sunset provision, under which many features of the law change or expire in several years, was a gimmick designed to lower its impact on the budget deficit.)

The Tax Cuts and Jobs Act contained three essential elements, two of which substantially strengthened the U.S. Tax Code and should be made permanent under any reform. The third one did not and should not.

The first two elements are the changes to the corporate and individual tax codes. America’s corporate tax rate is now commensurate with those of America’s economic peers, making the U.S. more competitive globally, and a change in the expensing of capital purchases will encourage investment. The individual code, meanwhile, has been simplified, and an increase in the standard deduction is essentially a tax cut for millions of Americans.

Together these two elements give U.S. businesses and taxpayers stronger incentives to save and invest. If made permanent, the Tax Foundation estimated last year, they could increase the total amount of capital invested in the U.S. economy by 12 percent.

The third element is the creation of a major new loophole in the form of large deductions for what are known as pass-through entities. These are essentially business structures, such as limited-liability corporations, that allow the owners to avoid paying corporate taxes and instead have their corporate profits added to their individual tax liability.

This kind of structure makes sense for sole proprietorships and other small businesses. Increasingly, however, driven in part by the U.S.’s relatively high corporate tax rate, it had been used by midsized and large businesses. Part of the rationale for lowering the corporate rate was to remove some incentive to form pass-through entities.

Unfortunately, the Tax Cut and Jobs Act also created a whole new incentive to classify a business this way. Under the law, an individual can claim a 20 percent tax deduction for any income classified as business income. That means high earners such as celebrities, financial professionals and surgeons have an incentive to form LLCs and claim this deduction, even when their services more closely resemble those of an employee rather than an entrepreneur.

It’s not as if members of Congress couldn’t have seen this coming. When Kansas included a similar loophole in its tax reform in 2012, it saw a 20 percent increase in the number of pass-through entities. This led to a $300 million decline in revenue, and Kansas officials essentially rescinded their tax reform in 2017.

Lowering marginal tax rates and encouraging investment are worthwhile goals. But the creation of a large pass-through deduction undermines those efforts, creating a tax loophole that is largely unavailable to middle-class taxpayers. It narrows the tax base, reduces long-term revenue projections and undermines the efficiency gains from the reform if the individual tax code.

As members of Congress consider tax reform — regardless of whether they actually vote on it — they should keep these larger goals in mind: reduce complexity and encourage economic growth. The pass-through deduction does neither.

Source: Accountingtoday.com via Bloomberg News