We’re approaching nearly a year and a half since significant federal and state tax reform was enacted, and businesses of all sizes and entity type are still trying to fully understand the changes and how they are impacted. Additional guidance and regulations have been issued nearly every month to clarify and help with the application of these new laws. Strategic tax planning is now – more than ever – a key to lowering a taxpayer’s total tax liability and fully utilizing these laws to one’s advantage. The following are some of the topics that we discuss with our clients on a regular basis as part of their 2019 strategy.
Section 199A Deduction – This has been a topic of endless discussion and debate since being enacted. The qualified business income deduction (199A) presents an opportunity that may reduce a pass-through owner’s maximum individual effective tax rate from 37% to 29.6%. Taxpayers should determine whether they qualify for the 199A deduction when estimating their projected 2019 taxable income and while evaluating choice of entity considerations post-tax reform.
Interest Deduction Limitation – Taxpayers now face possible limitations on their ability to deduct business interest paid or accrued on debt allocable to a trade or business pursuant to Section 163(j). Section 163(j) may limit the deductibility of business interest expense to the sum of (1) business interest income; (2) 30% of the adjusted taxable income (ATI) of the taxpayer; and (3) the floor plan financing interest of the taxpayer for the taxable year (applicable to dealers of vehicles, boats, farm machinery or construction machinery).
Exceptions do exist for small business taxpayers whose average annual gross receipts over the past three years do not exceed $25 million, certain electing real property trades or businesses, electing farming businesses and certain utilities.
Economic Nexus/Wayfair decision – The South Dakota v. Wayfair decision means that states are now allowed to subject companies to state taxes based on an economic presence within their state. Taxpayers must now determine their nexus and filing obligations in states and localities, where compliance was not required in the past. This judgement presents an opportunity for taxpayers to enhance their technology solutions and update their reporting tools as they comply with state law changes.
Bonus Depreciation – Expanded bonus depreciation rules allow taxpayers full expensing of both new and used qualifying property placed in service before 2023, creating significant incentives for making new investments in depreciable tangible property and computer software. Bonus depreciation allowances increased from 50 to 100% for qualified property acquired and placed in service after September 27, 2017, and before 2023 (January 1, 2024 for longer production period property and certain aircraft). Businesses should plan for purchases of eligible property to optimize the potential tax savings.
Opportunity Zones – New Opportunity Zone tax incentives allow investors to defer tax on capital gains by investing in Qualified Opportunity Funds. Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund during the 180 day period beginning on the date of the sale or exchange giving rise to the capital gain. Once rolled over, the capital gain will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a no tax basis. If the investment is held for five years, there is a 10% step-up in basis and a 15% step-up if held for seven years. If the investment is held in the opportunity fund for at least 10 years, those capital gains in excess of the rollover amount (i.e., not the original gain but the post-acquisition appreciation) would be permanently exempt from taxes. To maximize the potential benefits, taxpayers must invest in a Qualified Opportunity Fund before December 31, 2019.
Corporate Alternative Minimum Tax (AMT) Rescinded – This change presents a tax planning opportunity, as AMT credits can offset the regular tax liability for years after 2017. Going forward, any prior AMT liabilities may offset the regular tax liability for any taxable year after 2017. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in an amount equal to 50% (100% for taxable years beginning in 2021) of the excess credit for the taxable year subject to a 6.2% sequestration rate.
Federal Research Credit – Businesses may want to revisit this credit after tax reform due in part to the repeal of the corporate AMT and new rules related to net operating loss (NOL) limitations. Now that AMT has been repealed, companies that paid AMT may now be paying regular income tax, which can be offset by the R&D credit, and income tax that can no longer be offset by NOLs, the R&D credit may help offset.
As stated before, these are some of the hotter topics to consider for 2019, but we continue to be mindful of many other strategies as they apply to a particular taxpayer’s specific tax situation. Need guidance on next steps? Start Here.
About the Author
John Roderique, CPA – Tax Director
On a day-to-day basis, John helps clients with tax compliance, tax planning and consults on financial transactions. He focuses his attention on the construction, real estate and healthcare industries and has experience working with mergers and acquisitions.
A graduate of Truman State University, John holds a Bachelor of Science in Accounting. He belongs to the American Institute of Certified Public Accountants, Nebraska Society of CPAs, Western Douglas County Chamber of Commerce and St. Patrick’s Catholic Church of Elkhorn. In his free time, John enjoys spending time with his family, watching movies, running, playing golf and fishing.
