Tax Reform Impact on Depreciation and Expensing

Transcription

1 Tax Reform Impact on Depreciation and Expensing 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

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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 nearly 6,000 privately held manufacturers and distributors 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; and Determine whether opportunities exist to capture benefits for 2017 and prior years at the higher pre-reform tax rates. 6

7 Speaker Introductions Mark Colvin, EA, MBA Mark is a regional leader within CliftonLarsonAllen s Federal Tax Consulting Services Team and national leader regarding cost segregation and fixed asset related projects. With more than 30 years of experience, Mark has an extensive background in capital projects and fixed asset management. Prior to joining CLA, Mark spent his career in various roles including controller, assistant controller, director of operations and accounting, and general manager. This extensive experience has given him a deep understanding of the issues and concerns facing financial managers in today s challenging environment. 7

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9 Tax Cuts and Jobs Act of 2017 Impact on Business Depreciation and 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 9

10 Bonus Depreciation Old Rules- Only Original Use Assets 50 % Bonus on qualifying assets in service before 9/28/17 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 Missed opportunities 1/1/16 to 12/31/2017??? Date-in-Service Date property is available and in a state of readiness for its intended purpose Why old rules matter- Binding contract issue 10

11 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 11

12 Bonus Depreciation- Old Rules Important Rules on Qualified Property Qualified Leasehold Improvement Property- Different rules in different prior years. If qualifying, 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 (must be non-structural or elevators/escalators) Qualified Improvement Property- More liberal rules and eligible for bonus. Any interior, non-structural, improvement to a building already placed into service- 39 year but bonus eligible Only applicable in 2016 &

13 Example Qualified Improvement Property- Old Rules 13

14 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). 14

15 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 (must be non-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 (in certain years prior to 2018) 15

16 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 (can only elect out after 12/31/17) 16

17 Alternative Depreciation System For Mandatory or Elected use of the Alternative Depreciation System (ADS) Residential Rental Real Property has been moved from 40-year to 30-year recovery period. 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). 17

18 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). This may create an opportunity for certain real property businesses to elect out of the interest expense limitation and reduce the recovery periods of qualifying property through a cost segregation study. 18

19 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 carried forward indefinitely o Businesses with <$25M average annual gross receipts exempt

20 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

21 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) Available for assets after 12/31/17 Election to use ADS- applies to all assets in service that year but is irrevocable. 21

22 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 22

23 Other Important Issues to Consider on Reform Beginning in 2018, Net Operating Losses can only be utilized to offset up to 80% of taxable income. 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 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 for this purpose 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. 23

24 National and International Reach CLA has more than 5,400 professionals, operating from more than 110 locations across the country. 24

25 CLAconnect.com C. Mark Colvin, EA, MBA Principal linkedin.com/company/ cliftonlarsonallen facebook.com/ cliftonlarsonallen twitter.com/claconnect youtube.com/cliftonlarsonallen 2 5