Depreciation and Expensing Opportunities Under Tax Reform

Transcription

1 Depreciation and Expensing Opportunities Under Tax Reform CliftonLarsonAllen (CLA)

2 Disclaimers The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by CliftonLarsonAllen LLP to the user. The user also is cautioned that this material may not be applicable to, or suitable for, the user s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The user should contact his or her CliftonLarsonAllen LLP or other tax professional prior to taking any action based upon this information. CliftonLarsonAllen LLP assumes no obligation to inform the user of any changes in tax laws or other factors that could affect the information contained herein. 2

3 Housekeeping If you are experiencing technical difficulties, please dial: Q&A session will be held at the end of the presentation. Your questions can be submitted via the Questions Function at any time during the presentation. The PowerPoint presentation, as well as the webinar recording, will be sent to you within the next 10 business days. For future webinar invitations, subscribe at CLAconnect.com/subscribe. Please complete our online survey. 3

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5 About CliftonLarsonAllen A professional services firm with three distinct business lines Wealth Advisory Outsourcing Audit, Tax, and Consulting More than 5,400 employees Offices coast to coast We serve over 5,000 privately held construction contractors Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC. 5

6 Learning Objectives At the end of this session, you will be able to: Recognize key changes to the depreciation and expensing rules under the TCJA compared to the pre-reform law Identify techniques to make tax-efficient investments in equipment and your buildings Recognize potential technical corrections Congress is evaluating related to the new depreciation laws Determine whether opportunities exist to capture benefits for 2017 and prior years at the higher pre-reform tax rates. 6

7 Speaker Introductions Dan Greenhagen Dan is a Manager within CliftonLarsonAllen s National Tax Office Team assists clients nationally with technical services, tax law development and planning, cost segregation and fixed asset related projects. With more than 15 years of experience, Dan has supported countless clients through tax law changes. This extensive experience has given him a deep understanding of the issues and concerns tax reform brings to private sector business in today s challenging environment. 7

8 About Today s Presenters Perry McGowan is a professional tax advisor in CLA's Construction and Real Estate group in Minneapolis. He provides advisory services focused on the tax planning issues of construction contractors, real estate owners, and project designers. Perry applies his 35 years of experience to family-owned businesses and their CPAs, and provides thoughtful tax strategies, transaction design, and tax risk analysis. He serves as a national resource to the industry practice and a tax liaison to industry associations. Perry McGowan Technical Director, CLA Minneapolis Perry.McGowan@claconnect.com 8

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10 The Backdrop of Cost Recovery What s the deduction worth to me? 10

11 Tax Cuts and Jobs Act of 2017 Signed 12/22/2017 Generally effective 1/1/18 Depreciation rules generally effective 9/28/2017 Guidance from the IRS Proposed Regulations 8/3/2018 for Asset Expensing Proposed Regulations 8/7/2018 for 199A 11

12 Individuals, Estates & Trusts Tax Rate 37% Corporations Tax Rate 21% Including S corporations & Partnerships 12

13 Entity Selection: The C Corporation Beginning in 2018, a flat tax rate on all income New Corporate Tax Rate 21.00% Estimated Value of Deduction for State Income Tax -1.00% Section 199A Qualified Business Income Deduction 0.00% Tax Rate on Corporate Income (including PSCs) 20.00% R&D or Other Credits May Reduce this Effective Rate 13

14 Entity Selection: Individuals Taxable Income Post-Reform Tax Average Rate 30,000 3, % 50,000 5, % 70,000 8, % 100,000 13, % 150,000 24, % 200,000 36, % 300,000 60, % 400,000 91, % 500, , % 700, , % 1,000, , % 1,500, , % 2,000, , % 3,000,000 1,049, % 4,000,000 1,419, % 5,000,000 1,789, % 7,000,000 2,529, % 10,000,000 3,639, % MFJoint Rates 14

15 Entity Selection: Individuals Taxable Income Post-Reform Tax Average Rate Add Full 199A 30,000 3, % 8.58% 50,000 5, % 8.99% 70,000 8, % 9.16% 100,000 13, % 11.10% 150,000 24, % 13.27% 200,000 36, % 14.63% 300,000 60, % 16.15% 400,000 91, % 18.28% 500, , % 20.22% 700, , % 22.67% 1,000, , % 24.75% 1,500, , % 26.37% 2,000, , % 27.18% 3,000,000 1,049, % 27.98% 4,000,000 1,419, % 28.39% 5,000,000 1,789, % 28.63% 7,000,000 2,529, % 28.91% 10,000,000 3,639, % 29.12% MFJoint Rates 15

16 Net Operating Losses (NOL) For losses arising in tax years beginning after December 31, 2017 the loss is carried forward indefinitely and the deduction is limited to 80% of taxable income For taxable years ending after December 31, 2017 the two-year carryback is repealed Calendar year 2017 losses still carry back 2017 NOLs are not subject to the 80% limit 16

17 Non-Corporate Business Losses For years beginning after 12/31/17 and before 1/1/26 an excess business loss is a carryforward NOL item An EBL is the excess of the aggregate business deductions over the sum of gross income or gain from such business plus $500,000 MFJ ($250,000 Single) Limit is applied at the 1040 level to aggregate losses Compute aggregate losses after passive limits are applied 17

18 Major Impacts Changing Taxable Income in 2018 For those with average revenues <$25 million Possible changes from the accrual to the cash method Possible changes in UNICAP (Sec. 263A) capitalization Possible changes in inventories to non-incidental materials Possible changes from PCM to other method For those with average revenues > $25 million All Possible interest expense limitations Changes in state tax deductibility, AMT, Credits 18

19 Cost Recovery Can I write it off? 19

20 Paths to a Write-off Repair and Maintenance Expenditure is merely restorative Section 179 for Small Business Limit of $1 million with total additions <$2.5 million Asset Expensing (Bonus Depreciation) Unlimited amounts Excludes most real property 20

21 Tax Cuts and Jobs Act of 2017 Impact on Business Depreciation and Expensing: Asset Expensing (Bonus Depreciation) Important Dates Qualifying Assets Phase Down Provisions Limitations for Entities Electing out of Business Interest Deduction Limitation Other Important Elections Revision of Qualified Property Sec. 179 Expensing Provisions Other Tax Strategies around Depreciation 21

22 Bonus Depreciation Old Rules- Only Original Use Assets 50 % Bonus on qualifying assets in service before 9/28/17 Optionally available to 12/31/17 Phasing down to 40% in 2018, 30% in 2019, none after 2019 Applied to certain Qualifying Real Property Qualified Leasehold Improvement Property- 15 year, bonus eligible Qualified Improvement Property- 39 year, bonus eligible Date-in-Service Date property is available and in a state of readiness for its intended purpose Why old rules matter- Binding contract issue 22

23 Summary of Old Rules for Building Improvements Building Improvements- For Additions In 2016 & 2017 Recovery Period 50% Bonus as QIP? Qualified Improvement Property: Interior Improvements- Not elevator/escalator, or structural 39 yr. Yes No Exterior or Structural Modifications 39 yr. No No Section 179? Qualified Leasehold Improvement Property (Subject to Lease Agreement) Unrelated lessor lessee (QLIP) & bldg. > 3 yrs. Interior Only 15 yr. Yes Yes/w limit Related lessor lessee (QIP) or bldg. < 3 yrs. Bonus on Interior Only 39 yr. Yes No Qualified Restaurant Property: Exterior 15 yr. No Yes/w limit Interior: New construction 15 yr. No Yes/w limit Interior: Bldg. previously in service 15 yr. Yes Yes/w limit Qualified Retail Improvement Property: Bldg. > 3 yrs. in service & retailing goods 15 yr. Yes Yes Bldg. < 3 yrs. in service or retailing services 39 yr. Yes No Rev. Proc Provides Additional Incentives for Retail & Restaurants 23

24 Bonus Depreciation- Old Rules Important Rules on Qualified Property Qualified Leasehold Improvements- 15 year tax life and bonus. Building at least 3 years old at time of improvement Subject to Lease agreement with unrelated party Interior improvements (cannot be structural or elevators/escalators) Qualified Improvement Property- More liberal, plus bonus. Any interior, non-structural, improvement to a building already placed into service- 39 year but bonus eligible Only applicable in 2016 &

25 Example Qualified Improvement Property- Old Rules 25

26 Bonus Depreciation- Old Rules Important Rules on Qualified Property Historically, the best of each category could be combined if they met the requirements of each (QRIP & QIP). Due to the confusion of the requirements, the intent of reform was to combine all these categories into Qualified Improvement Property with a 15 year recovery period and eligible for 100% bonus depreciation (but not full restaurant structures). Congress did combine the language, but failed to include 15-year recovery period, thus in 2018 all 39 year and no bonus (but eligible for 179). 26

27 Bonus Depreciation- Old Rules Important Rules on Qualified Property Qualified Retail Improvement Property- Different rules in different prior years. If qualifying, 15 year tax life, but no bonus. Building at least 3 years old at time of improvement Interior improvements (cannot be structural or elevators/escalators) Must be part of area dedicated to the sales of tangible property Qualified Restaurant Property- 15 year tax life, but no bonus Includes entire building Includes new buildings and acquisitions 27

28 Bonus Depreciation- New Rules New Rules- New and Used Assets are eligible 100 % Bonus on qualifying assets in service after 9/27/17 Phasing down to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and none after 2026 Currently does not include prior Qualifying Real Property Legislative error- Qualified Improvement Property Can elect 50% bonus for assets in service before 1/1/18 28

29 Bonus Depreciation- New Rules Section 754 Step-up May Qualify Under Proposed Regs Section 743(b) step-ups on partner to partner sales qualify Section 734(b) step-ups on partnership redemptions do not qualify 29

30 Alternative Depreciation System New Rules May be Mandatory or Elected ADS life of Residential Rental Real Property moves from 40-year to 30-year recovery period. ADS life of Non-residential Real property remains 40 years Qualified Improvement Property is provided a 40-year recovery period (until possible technical correction- then 20). The ADS regime prohibits bonus depreciation and is S/L. This depreciation system is required for certain taxpayers leasing to tax exempt entities and for certain taxpayer electing out of the business interest deduction limitation (explained later). 30

31 Business Interest Expense Deduction Limitation In General, under Tax Reform starting in 2018: The business interest deduction is limited to the sum of: 1. Business Interest Income; 2. 30% of the adjusted taxable income for the year (not less than 0); 3. The floor plan financing interest expense for the year. A real property trade or business can elect out of the limitation but will be required to use the ADS system (on prior assets too). Nonresidential real property, residential real property, and QIP This may create an opportunity for real property businesses to elect out of interest expense limitation and reduce recovery periods of certain property through a cost segregation study. 31

32 Disallowed Business Interest Expense Pre-TCJA: Business interest generally allowed as a deduction Under TCJA: Interest expense limited to interest income + 30% of remaining adjusted taxable income o Remaining business adjusted taxable income is: Determined w/o interest income, NOL, 199A, depreciation, amortization, depletion Determined at tax filer level (1065, 1120-S, 1120) o Excess (nondeductible) interest carries forward indefinitely o Businesses with <$25M average annual gross receipts exempt

33 Example Business Interest Expense Deduction Limitation Assumptions: o Average annual revenue $200M o Taxable income: $10M o Interest income: $500K o Interest expense: $7.5M Adjusted Taxable Income: Calculation Taxable Income $10,000,000 Add: Depreciation and Amortization $3,000,000 Add: Interest Expense Deducted 7,500,000 Subtract: Interest Income Included in Taxable Income (500,000) Equals: Adjusted Taxable Income 20,000,000 Limitation Calculation: 30% Adjusted Taxable Income $6,000,000 Plus: Interest Income $500,000 Limitation based on ATI $6,500,000 Lesser of Above Limit ($6.5M) or Interest Expense ($7.5M) $6,500,000

34 Other Important Elections and Useful Information Election out of 100% bonus and use 50% Bonus Only available for assets in service between 9/28 and 12/31, 2017 Election out of 100% to no bonus- by class of assets (i.e.- 5 year) Election to use ADS- applies to all assets in service that year but is irrevocable. 34

35 Sec Business Expensing Old Rules- Limit was $500k but was phased out dollar-for-dollar for amounts over $2MM Applies to tangible personal property. Also to certain Qualified real property up to a $500k limit New Rules- Limit was raised to $1MM with the phase out beginning on amounts over $2.5MM. Includes tangible personal property Includes new definition of Qualified Improvement Property Includes assets used in furnishing lodging Now includes roofs, HVAC, and fire/security alarm systems 35

36 Procurement Planning for Calendar 2018 Filers Assets placed in service by August 31 represent potential deductions available to reduce tax payments in the third quarter Assets placed in service by December 31 represent potential deductions available to reduce tax payments in the fourth quarter 36

37 Last Chance for Adjustments to 2017 Depreciation methods can be changed (corrected) for 2017 until the extended due date. There should be some consideration for accelerating depreciation deductions into Not only are rates higher (deduction more valuable) but if a loss is created/increased, the loss can be carried back or can be carried over and utilized at 100%. Even if 2017 returns have been filed, there is still an opportunity to review the assets for potential. Amended returns can be completed until the extended due date. The Tangible Property Regulations still apply For those that have not reviewed historical assets for the potential immediate deduction, there is still an opportunity to do so. Especially for the 2017 return (see above). We can still assist with formal Capitalization Policies and to determine proper de minimis elections. 37

38 Cost Recovery Evaluation An overview of today s discussion 1. A changing tax rate environment, including 199A 2. Loss Limitations 3. Accounting Method Impacts 4. Interest Expense Limitations 5. Cost Recovery Repair, 179, Asset Expensing 6. Timing Your Investment Year 7. Catching up Missed Deduction in

39 For More of the Story See Also For Construction: Search on Google for Perry McGowan Tax Reform for Construction For Real Estate: Search on Google for Perry McGowan Tax Reform for Real Estate 39

40 National and International Reach CLA has more than 5,400 professionals, operating from more than 110 locations across the country. 40

41 CLAconnect.com Dan Greenhagen, JD Perry H. McGowan, CPA JD linkedin.com/company/ cliftonlarsonallen facebook.com/ cliftonlarsonallen twitter.com/claconnect youtube.com/cliftonlarsonallen 4 1