New 20% Qualified Business Income Deduction

A major highlight of the 2017 Tax Cuts and Jobs Act (the Act) is the availability of a 20% deduction for "qualified business income (QBI)" received in 2018 and later years.  This provision is expected to provide a substantial tax benefit to individuals with QBI from a partnership, S corporation, LLC, or sole proprietorship. Income from these sources is sometimes referred to as “pass-through” income.

The deduction is 20% of your QBI from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership's business.

The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.

Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.

For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from “specified service” trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners. Here's how the phase-in works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), all of the net income from the specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) If your taxable income is between $157,500 and $207,500, you would exclude only that percentage of income derived from a fraction the numerator of which is the excess of taxable income over $157,500 and the denominator of which is $50,000. So, for example, if taxable income is $167,500 ($10,000 above $157,500), only 20% of the specified service income would be excluded from QBI ($10,000/$50,000). (For joint filers, the same operation would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Additionally, for taxpayers with taxable income more than the above thresholds, a limitation on the amount of the deduction is phased in based either on wages paid or wages paid plus a capital element. Here's how it works: If your taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). So if your QBI were $100,000, leading to a deduction of $20,000 (20% of $100,000), but the greater of (1) or (2) above were only $16,000, your deduction would be limited to $16,000, i.e., it would be reduced by $4,000. And if your taxable income were between $157,500 and $207,500, you would only incur a percentage of the $4,000 reduction, with the percentage worked out via the fraction discussed in the preceding paragraph. (For joint filers, the same operations would apply using the $315,000 threshold, and a $100,000 phase-out range.)

Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.

Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. 

If you would like more information on this topic or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

2017 Tax Cuts and Jobs Act - Business Provisions

On December 22, 2017, the President signed into law the most sweeping tax changes since 1986.  The new law is known as the "Tax Cuts and Jobs Act."  We have highlighted some major provisions affecting businesses below.

• Corporate tax rate reduced. For tax years beginning after Dec. 31, 2017, the corporate tax rate is a flat 21% rate.

• Dividends received deduction percentages reduced. For tax years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%. 

• AMT repealed. For tax years beginning after Dec. 31, 2017, the corporate AMT is repealed. For tax years beginning after 2017 and before 2022, the AMT credit is refundable in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability.

Meals & Entertainment deduction provisions

• Meal, entertainment and fringe benefit changes. There are five changes to note in this area, all effective for amounts incurred or paid after Dec. 31, 2017: 

1. Deductions for business-related entertainment expenses are disallowed.
2. The 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.
3. Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained (except in the case of qualified bicycle commuting reimbursements).
4. No deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee. However, this bar on deducting transportation expenses doesn't apply to any qualified bicycle commuting reimbursement, for amounts paid or incurred after Dec. 31, 2017, and before Jan. 1, 2026.
5. For purposes of the employee achievement award rules, “tangible personal property” does not include cash, cash equivalents, gifts cards, gift coupons, gift certificates (other than where the employer pre-selected or pre-approved a limited selection) vacations, meals, lodging, tickets for theatre or sporting events, stock, bonds or similar items. and other non-tangible personal property. 

Depreciation provisions

• Expensing rules liberalized. For property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount a taxpayer may expense under Code Sec. 179 is increased to $1 million, and the phase-out threshold amount is increased to $2.5 million.

• Property eligible for expensing is expanded. For property placed in service in tax years beginning after Dec. 31, 2017, the definition of Code Sec. 179 property is expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging. The definition of qualified real property eligible for Code Sec. 179 expensing also is expanded to include the following improvements to nonresidential real property after the date such property was first placed in service: roofs; heating, ventilation, and air-conditioning property; fire protection and alarm systems; and security systems. 

• Increased luxury auto dollar limits. For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, for which the additional first-year depreciation deduction under Code Sec. 168(k) is not claimed, the maximum amount of annual allowable depreciation/expensing deduction is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period. For passengers autos eligible for bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. In addition, computer or peripheral equipment is removed from the definition of listed property and so isn't subject to the heightened substantiation requirements that apply to listed property. 

• 15-year writeoff for qualified improvement property. For property placed in service after Dec. 31, 2017, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property eligible for a 15-year writeoff, are replaced with new category called qualified improvement property, which is depreciated over 15 years via straight line (or 20 years via the Alternative Depreciation System (ADS)). Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, except for any improvement for which the expenditure is attributable to (1) enlargement of the building, (2) any elevator or escalator, or (3) the internal structural framework of the building. 

• Shortened ADS recovery period for residential realty. For property placed in service after Dec. 31, 2017, the ADS recovery period for residential rental property is shortened from 40 years to 30 years. 

• Shortened recovery period for farming equipment. For property placed in service after Dec. 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. 

• In addition, the required use of 150% declining balance depreciation for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method. 

• ADS use for certain farm assets. For tax years beginning after Dec. 31, 2017, an electing farming business—i.e., a farming business electing out of the new Code Sec. 163(j) limitation on the deduction for interest (discussed below)—must use ADS to depreciate any property with a recovery period of 10 years or more (e.g., a single purpose agricultural or horticultural structure, trees or vines bearing fruit or nuts, farm buildings, and certain land improvements). 

Other business provisions

• More taxpayers eligible to deduct costs of replanting citrus plants lost due to casualty. The uniform capitalization rules of Code Sec. 263A don't apply to certain agricultural producers and co-owners; instead, they can deduct costs incurred in replanting edible crops for human consumption following loss or damage due to freezing temperatures, disease, drought, pests, or casualty. For replanting costs paid or incurred after Dec. 22, 2017, but not after Dec. 22, 2027, for citrus plants lost or damaged due to casualty, the definition of taxpayers eligible to deduct such costs is expanded to include a person other than the taxpayer if (1) the taxpayer has an equity interest of not less than 50% in the replanted citrus plants at all times during the tax year in which the replanting costs are paid or incurred and such other person holds any part of the remaining equity interest, or (2) such other person acquires all of the taxpayer's equity interest in the land on which the lost or damaged citrus plants were located at the time of such loss or damage, and the replanting is on such land. 

• Tax on medical devices goes into effect. For sales after Dec. 31, 2017, a tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of such device. A taxable medical device is any device defined in §201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) that's intended for humans. A “device” is an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article. There's a retail exemption for items such as eyeglasses, contact lenses and hearing aids. The tax was to have gone into effect after 2015, but the “Protecting Americans From Tax Hikes” Act provided for a 2-year moratorium on the tax.

• Limits on deduction for business interest. For tax years beginning after Dec. 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business's adjusted taxable income. The net interest expense disallowance is determined at the tax filer level. However, a special rule applies to pass-through entitles, which requires the determination to be made at the entity level (e.g., at the partnership level instead of the partner level). 
  • For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2022, adjusted taxable income of a business is computed without regard to various deductions, including the deductions for depreciation, amortization, or depletion and without the former Code Sec. 199 deduction (which is repealed effective Dec. 31, 2017).
  • The amount of any business interest not allowed as a deduction for any taxable year is treated as business interest paid or accrued in the succeeding tax year. Business interest may be carried forward indefinitely, subject to certain restrictions applicable to partnerships. 
  • An exemption from these rules applies for taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior tax year that do not exceed $25 million. The business-interest-limit provision does not apply to certain regulated public utilities and electric cooperatives. Real property trades or businesses can elect out of the provision if they use ADS to depreciate applicable real property used in a trade or business. Farming businesses can also elect out if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more. An exception from the limitation on the business interest deduction is also provided for floor plan financing (i.e., financing for the acquisition of motor vehicles, boats or farm machinery for sale or lease and secured by such inventory).
  • Special rules apply to partnerships and to the carryforward of disallowed partnership interest.

• NOL deduction modified. For NOLs arising in tax years ending after Dec. 31, 2017, the two-year carryback and the special carryback provisions generally are repealed.
  • For losses arising in tax years beginning after Dec. 31, 2017, the NOL deduction is limited to 80% of taxable income (determined without regard to the NOL deduction, itself). Carryovers to other years are adjusted to take account of this limitation, and, except as provided below, NOLs can be carried forward indefinitely.
  • A two-year carryback applies in the case of certain losses incurred in the trade or business of farming. Additionally, NOLs of property and casualty insurance companies can be carried back two years and carried over 20 years to offset 100% of taxable income in such years. 

• DPAD repealed. For tax years beginning after Dec. 31, 2017, the domestic production activities deduction (DPAD) is repealed. 

• Five-year writeoff of specified R&E expenses. For amounts paid or incurred in tax years beginning after Dec. 31, 2021, “specified R&E expenses” must be capitalized and amortized ratably over a 5-year period (15 years if conducted outside of the U.S.), beginning with the midpoint of the tax year in which the specified R&E expenses were paid or incurred.
  • Specified R&E expenses subject to capitalization include expenses for software development, but not expenses for land or for depreciable or depletable property used in connection with the research or experimentation (but do include the depreciation and depletion allowances of such property). Also excluded are exploration expenses incurred for ore or other minerals (including oil and gas). In the case of retired, abandoned, or disposed property with respect to which specified R&E expenses are paid or incurred, any remaining basis may not be recovered in the year of retirement, abandonment, or disposal, but instead must continue to be amortized over the remaining amortization period.

• Broadened denial of deduction for fines, penalties, etc. For amounts generally paid or incurred on or after Dec. 22, 2017, no deduction is allowed for any otherwise deductible amount paid or incurred (whether by suit, agreement, or otherwise) to, or at the direction of, a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Certain exceptions apply. 
  • The above provisions don't apply to amounts paid or incurred under any binding order or agreement entered into before Dec. 22, 2017. But this exception does not apply to an order or agreement requiring court approval unless the approval was obtained before Dec. 22, 2017.
  • No deduction for amount paid for sexual harassment subject to nondisclosure agreement. Effective for amounts paid or incurred after Dec. 22, 2017, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. 

• Deduction for local lobbying expenses repealed. For amounts paid or incurred on or after Dec. 22, 2017, the Code Sec. 162(e) deduction for lobbying expenses with respect to legislation before local government bodies (including Indian tribal governments) is eliminated. 

• Exclusions from contributions to capital. Effective for contributions made after Dec. 22, 2017 (except as otherwise provided below), the term “contributions to capital” for purposes of Code Sec. 118 (contributions to the capital of a corporation) does not include: any contribution in aid of construction or any other contribution as a customer or potential customer, and any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). 
  • The new rule does not apply to any contribution made after Dec. 22, 2017, by a governmental entity pursuant to a master development plan that had been approved before Dec. 22, 2017, by a governmental entity.

• Orphan drug credit modified. For amounts paid or incurred after Dec. 31, 2017, the Code Sec. 45C orphan drug credit is limited to 25% (instead of prior law's 50%) of qualified clinical testing expenses for the tax year. Taxpayers can elect a reduced credit in lieu of reducing otherwise allowable deductions in a manner similar to the research credit under Code Sec. 280C. 

• Rehab credit modified. For amounts paid or incurred after Dec. 31, 2017, the 10% credit for qualified rehabilitation expenditures with respect to a pre-'36 building is repealed, and a 20% credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure; the credit can be claimed ratably over a 5-year period beginning in the tax year in which a qualified rehabilitated structure is placed in service. 

• New credit for employer paid family and medical leave. For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, businesses may claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave (FMLA) if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. To qualify for the credit, all qualifying full-time employees must be given at least two weeks of annual paid family and medical leave (and all less-than-full-time qualifying employees have to be given a commensurate amount of leave on a pro rata basis). 

• Limit on employee compensation deduction. A deduction for compensation paid or accrued with respect to a covered employee of a publicly traded corporation is limited to no more than $1 million per year. However, under prior law, exceptions applied for: (1) commissions; (2) performance-based remuneration, including stock options; (3) payments to a tax-qualified retirement plan; and (4) amounts that are excludable from the executive's gross income. For tax years beginning after Dec. 31, 2017, the exceptions to the $1 million deduction limit for commissions and performance-based compensation are repealed. The definition of “covered employee” is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee with respect to a corporation for a tax year beginning after Dec. 31, 2016, the individual remains a covered employee for all future years. Transition rules apply to a written binding contract which was in effect on Nov. 2, 2017.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

2017 Tax Cuts and Jobs Act - Individual Provisions

On December 22, 2017, the President signed into law the most sweeping tax changes since 1986.  The new law is known as the "Tax Cuts and Jobs Act."  We have highlighted some major provisions affecting individuals below.

• Revised income tax rates and tax brackets. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, seven tax rates apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. There are four tax rates for estates and trusts: 10%, 24%, 35%, and 37%.

• Boosted standard deduction. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018. No changes are made to the previously-existing additional standard deduction for the elderly and blind. 

• Personal exemptions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for personal exemptions is suspended—the exemption amount is reduced to zero. 

• Kiddie tax modified. For tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child's ordinary income and his or her income taxed at preferential rates. 

• Floor beneath medical expense deduction lowered. For tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019, for all taxpayers, medical expenses may be claimed as an itemized deduction to the extent they cumulatively exceed 7.5% of adjusted gross income. In addition, the rule limiting the medical expense deduction for AMT purposes to the excess of 10% of AGI doesn't apply to tax years beginning after Dec. 31, 2016 and ending before Jan. 1, 2019.

• State and local tax deduction limited. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, itemized deductions for an individual's state or local taxes (as opposed to such taxes paid in connection with a Code Sec. 162 trade or business or in a Code Sec. 212 activity) are limited. The aggregate deduction for an individual's state and local real property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes is limited to $10,000 ($5,000 for marrieds filing separately). The deduction for foreign real property taxes is completely eliminated unless paid or accrued in carrying on a trade or business or in an activity engaged in for profit. 

• Reduction in home mortgage and home equity interest deductions. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for interest on home equity debt is suspended, and the deduction for home acquisition mortgage interest is limited to underlying debt of up to $750,000 ($375,000 for married taxpayers filing separately). The new lower limit doesn't apply to any acquisition debt incurred before Dec. 15, 2017. And, a taxpayer who entered into a binding written contract before Dec. 15, 2017 to close on the purchase of a principal residence before Jan. 1, 2018, and who buys the residence before Apr. 1, 2018, is treated as incurring acquisition debt before Dec. 15, 2017.
  • Prior law's $1 million/$500,000 limitations continue to apply to taxpayers who refinance existing qualified residence debt that was incurred before Dec. 15, 2017, so long as the debt resulting from the refinancing doesn't exceed the amount of the refinanced debt. 

• Boosted charitable contribution deduction limit. For contributions made in tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the 50% limitation under Code Sec. 170(b) for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation generally may be carried forward and deducted for up to five years, subject to the later year's ceiling.

• No charitable deduction for college athletic seating rights. For contributions made in tax years beginning after Dec. 31, 2017, no charitable deduction is allowed for any payment to an institution of higher education in exchange for which the payor receives the right to buy tickets or seating at an athletic event. 

• Miscellaneous itemized deduction suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there's no deduction for miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) floor. 

• “Pease” limit on itemized deductions suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the “Pease limit” on itemized deductions is suspended. Under this limit, the otherwise allowable amount of certain itemized deductions was reduced by 3% of the amount of a taxpayer's AGI exceeding a threshold amount; the total reduction couldn't be greater than 80% of all itemized deductions.

• Other suspensions: The following exclusions and deductions don't apply for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026:
  • The exclusion from gross income and wages for qualified bicycle commuting reimbursements.
  • The exclusion for qualified moving expense reimbursements, except for members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station. 
  • The deduction for moving expenses, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station. 

• Additionally, for tax years beginning after Dec. 22, 2017, members of Congress cannot deduct living expenses when they are away from home. 

• AMT exemption amounts increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the alternative minimum tax (AMT) exemption amounts for individuals are increased to be the following amounts:
  • For joint returns and surviving spouses, $109,400.
  • For marrieds filing separately, $54,700. 
  • For single taxpayers, $70,300.
  • The above exemption amounts are reduced (not below zero) to an amount equal to 25% of the amount by which the taxpayer's alternative minimum taxable income (AMTI) exceeds the following increased phase-out amounts:
    • For joint returns and surviving spouses, $1 million.
    • For all other taxpayers (other than estates and trusts), $500,000.

• Limited exclusion for student loans. For discharges of debt after Dec. 31, 2017 and before Jan. 1, 2026, the amount of certain student loans that are discharged on account of death or total and permanent disability of the student is excluded from gross income. 

• Child tax credit increased. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the child tax credit is increased to $2,000. Other modifications to the child tax credit are:
  • The income levels at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers) (not indexed for inflation).
  • A $500 nonrefundable credit is provided for certain non-child dependents.
  • The amount of the credit that is refundable is increased to $1,400 per qualifying child, and this amount is indexed for inflation, up to the base $2,000 base credit amount. The earned income threshold for the refundable portion of the credit is decreased from $3,000 to $2,500.
  • No credit is allowed to a taxpayer with respect to any qualifying child unless the taxpayer provides the child's SSN. 

• New excess business loss limitation. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the excess farm loss limitation of former Code Sec. 461(j) doesn't apply, and instead a noncorporate taxpayer's “excess business loss” is disallowed. Under the new rule, excess business losses are not allowed for the tax year but are instead carried forward and treated as part of the taxpayer's net operating loss (NOL) carryforward in subsequent tax years. This limitation applies after the application of the Code Sec. 469 passive loss rules. 
  • An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount. The threshold amount for a tax year is $500,000 for married individuals filing jointly, and $250,000 for other individuals, with both amounts indexed for inflation. 
  • For a partnership or S corporation, the new rule applies at the partner- or shareholder-level.

• Gambling loss limit modified. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limit on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. 

• Deduction for personal casualty & theft losses suspended. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, there's no itemized deduction for personal casualty and theft losses, except for personal casualty losses incurred in a Federally-declared disaster. However, where a taxpayer has personal casualty gains, the loss suspension doesn't apply to the extent that such loss doesn't exceed the gain.

• New deferral election for stock grants of startups. Generally effective for stock attributable to options exercised or restricted stock units (RSUs) settled after Dec. 31, 2017, a qualified employee can elect to defer, for income tax purposes, recognition of the amount of income attributable to qualified stock transferred to the employee by a qualified employer. The election applies only for income tax purposes; the application of FICA and FUTA is not affected. If the election is made, the income has to be included in the employee's income for the tax year that includes the earliest of five events, one of which is the first date on which any stock of the employer becomes readily tradable on an established securities market.
  • The new election applies for qualified stock of an eligible corporation. A corporation is treated as eligible for a tax year if: (1) no stock of the employer corporation (or any predecessor) is readily tradable on an established securities market during any preceding calendar year, and (2) the corporation has a written plan under which, in the calendar year, not less than 80% of all employees who provide services to the corporation in the US (or any US possession) are granted stock options, or restricted stock units (RSUs), with the same rights and privileges to receive qualified stock. 
  • Detailed employer notice, withholding, and reporting requirements apply with regard to the election. 

• ABLE account liberalizations. Effective for tax years beginning after Dec. 22, 2017, and before Jan. 1, 2026, after the overall limitation on contributions to ABLE accounts is reached (i.e., the annual gift tax exemption amount; for 2018, $15,000), an ABLE account's designated beneficiary can contribute an additional amount, up to the lesser of (a) the Federal poverty line for a one-person household; or (b) the individual's compensation for the tax year. Additionally, the designated beneficiary of an ABLE account can claim the saver's credit under Code Sec. 25B for contributions made to his or her ABLE account. 
  • For distributions after Dec. 22, 2017, amounts from qualified tuition programs (QTPs, also known as 529 accounts) may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or a member of such designated beneficiary's family. Such rolled-over amounts are counted towards the overall limitation on amounts that can be contributed to an ABLE account within a tax year, and any amount rolled over in excess of this limitation is includible in the gross income of the distributee.

• Expanded use of Sec. 529 accounts. For distributions after Dec. 31, 2017, “qualified higher education expenses” for purposes of the Code Sec. 529 rules, include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. 

• Limitation on recharacterizations. For tax years beginning after Dec. 31, 2017, the rule that allows a contribution to one type of IRA to be recharacterized as a contribution to the other type of IRA does not apply to a conversion contribution to a Roth IRA. Thus, recharacterization cannot be used to unwind a Roth conversion. 

• Liberalized rules for awards to volunteers. For tax years beginning after Dec. 31, 2017, the aggregate amount of length of service awards that may accrue for a bona fide volunteer with respect to any year of service, is increased from $3,000 to $6,000. 

• Extended rollover period for plan loan offset amounts. For plan loan offset amounts which are treated as distributed in tax years beginning after Dec. 31, 2017, the period during which a qualified plan loan offset amount may be contributed to an eligible retirement plan as a rollover contribution is extended from 60 days after the date of the offset to the due date (including extensions) for filing the Federal income tax return for the tax year in which the plan loan offset occurs—that is, the tax year in which the amount is treated as distributed from the plan. A qualified plan loan offset amount is a plan loan offset amount that is treated as distributed from a qualified retirement plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan solely by reason of the termination of the plan or the failure to meet the repayment terms of the loan because of the employee's separation from service, whether due to layoff, cessation of business, termination of employment, or otherwise. A loan offset amount is the amount by which an employee's account balance under the plan is reduced to repay a loan from the plan. 

• Estate & gift tax exemption increased. For estates of decedents dying and gifts made after Dec. 31, 2017 and before Jan. 1, 2026, the base estate and gift tax exemption amount is doubled from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple).

• New holding period requirement for carried interest. Effective for tax years beginning after Dec. 31, 2017, there's a 3-year holding period requirement in order for certain partnership interests received in connection with the performance of services to be taxed as long-term capital gain. If the 3-year holding period is not met with respect to an applicable partnership interest held by the taxpayer, the taxpayer's gain will be treated as short-term gain taxed at ordinary income rates. 

• Capital asset treatment barred for certain self-created property. Effective for dispositions after Dec. 31, 2017, the definition of a “capital asset” does not include patents, inventions, models or designs (whether or not patented), and secret formulas or processes, which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created). 

• Like-kind exchange limitation. Generally effective for transfers after Dec. 31, 2017, gain on like-kind exchanges is deferred only with respect to real property that is not held primarily for sale. However, under a transition rule, the prior-law like-kind exchange rules continue to apply to exchanges of personal property if the taxpayer has either disposed of the relinquished property or acquired the replacement property on or before Dec. 31, 2017. 

• Broadened incentives for Qualified Opportunity Zone investment. Effective on Dec. 22, 2017, a new rule provides temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund. 

• Deductions for net disaster losses. For any tax year beginning after Dec. 31, 2017, and before Jan. 1, 2026, an individual's standard deduction is increased by the net disaster loss. Additionally, if any individual has a net disaster loss for any tax year beginning after Dec. 31, 2017 and before Jan. 1, 2026, the AMT adjustment for the standard deduction doesn't apply to the increase in the standard deduction that is attributable to the net disaster loss. 
  • A net disaster loss is the excess of (i) qualified disaster-related personal casualty losses, over (ii) personal casualty gains. “Qualified disaster-related personal casualty losses” are those described in Code Sec. 165(c)(3) that arise in a 2016 disaster area, namely any area with respect to which a major disaster was declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act during calendar year 2016. 

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

Q4 2017

Dear Tax Constituent:

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. In many cases, this will involve the time-honored approach of deferring income until next year and accelerating deductions into this year to minimize 2017 taxes. This time-honored approach may turn out to be even more valuable if Congress succeeds in enacting tax reform that reduces tax rates beginning next year in exchange for slimmed-down deductions. Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phaseouts of various tax breaks that are applicable for 2017.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us soon so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

• The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy may be especially valuable if Congress succeeds in lowering tax rates next year in exchange for slimmed-down deductions. Regardless of what happens in Congress, this strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2017. For example, this may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status).

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year and the assets in the Roth IRA account declined in value, you could wind up paying a higher tax than is necessary if you leave things as is. You can back out of the transaction by recharacterizing the conversion—that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don't pay your credit card bill until after the end of the year.

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won't be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2017 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2017. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2017, but the withheld tax will be applied pro rata over the full 2017 tax year to reduce previous underpayments of estimated tax.

• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.

• You may be able to save taxes by applying a bunching strategy to pull “miscellaneous” itemized deductions, medical expenses and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

• You may want to pay contested state taxes to be able to deduct them this year while continuing to contest them next year.

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70-½, the first distribution calendar year is the year in which the IRA owner attains age 70-½. Thus, if you turn age 70-½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018—the amount required for 2017 plus the amount required for 2018. Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.

• If you become eligible in December of 2017 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2017.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

• If you were affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty loss rules and eased access to your retirement funds. In addition qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren't subject to the usual charitable deduction limitations.

Year-End Tax-Planning Moves for Businesses & Business Owners

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2017, the expensing limit is $510,000 and the investment ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air conditioning and heating units, and qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

• Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year (the bonus percentage declines to 40% next year). The bonus depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus writeoff is available even if qualifying assets are in service for only a few days in 2017.

• Businesses may be able to take advantage of the “de minimis safe harbor election” (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2017.

• Businesses contemplating large equipment purchases also should keep a close eye on the tax reform plan being considered by Congress. The current version contemplates immediate expensing—with no set dollar limit—of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

• If your business was affected by Hurricane Harvey, Irma, or Maria, it may be entitled to an employee retention credit for eligible employees.

• A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

• A corporation should consider deferring income until next year if doing so will preserve the corporation's qualification for the small corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small corporation AMT exemption because if a corporation doesn't qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

• A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.

• If your business qualifies for the domestic production activities deduction (DPAD) for its 2017 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD would be abolished under the tax reform plan currently before Congress.

• To reduce 2017 taxable income, consider deferring a debt-cancellation event until 2018.

• To reduce 2017 taxable income, consider disposing of a passive activity in 2017 if doing so will allow you to deduct suspended passive activity losses.

These are just some of the year-end steps that can be taken to save taxes. 

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

Q3 2017

Dear Tax Constituent:

The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Healthcare bill moves through Congress. On May 4, the House of Representatives passed along party lines the American Health Care Act (AHCA), the Republican plan to repeal and replace the Affordable Care Act (ACA, also known as Obamacare), as amended. The House-passed bill would need to be reconciled with the Senate's version of health reform legislation.

The AHCA would repeal virtually all of the ACA tax provisions, including the following. (Except as otherwise provided, the repeal would go into effect in 2017).

• The penalty on individuals who don't carry adequate insurance, retroactively effective beginning in 2016.
• The employer shared responsibility penalty (i.e., the penalty that applies to certain employers who don't offer health care coverage for its full-time employees, or offers minimum essential coverage that is unaffordable or does not provide minimum value). The repeal would be retroactively effective beginning in 2016.
• The premium tax credit that makes health insurance premiums more affordable for certain low-income taxpayers. The repeal would be effective in 2020 (and a modified, age-based tax credit would be provided pending its repeal).
• The 3.8% net investment income tax (NIIT) on certain higher income individuals.
• The 0.9% additional Medicare tax on certain higher income individuals, effective 2023.
• The higher floor beneath medical expense deductions. Under current law, the floor is 10% (effective in 2013 for taxpayers under age 65 and in 2017 for taxpayers 65 and older). The AHCA would reduce the floor to 5.8% for all taxpayers beginning in 2017.
• The small employer health insurance credit, effective 2020.
• The dollar limitation (currently $2,700) on health Flexible Spending Account (FSA) contributions.
• The disallowance of any deduction for compensation in excess of $500,000 for certain health insurance executives.

The 40% excise tax (the so-called “Cadillac” tax) on high cost employer-sponsored health plans, would be delayed until 2026, but would not be repealed.

On July 13, the Senate leadership released its healthcare bill, renamed the Better Care Reconciliation Act of 2017 (BCRA), as amended, for consideration. It left most of the provisions of the House-passed bill intact, but notably did not call for the repeal of the 3.8% NIIT, the 0.9% additional Medicare tax, or the disallowance of any deduction for compensation in excess of $500,000 for certain health insurance executives.

Still time to make expensing election on amended returns. The tax law's expensing rules allow a business to elect to currently deduct the cost of business machinery and equipment—up to a dollar limit—instead of recovering its cost via depreciation over a number of years. The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) made a number of important improvements to the expensing break. The main changes were that the $500,000 annual expensing limitation and $2 million investment ceiling amount were retroactively extended and made permanent (they were to have expired after 2014). Additionally, the PATH Act made the following changes to the expensing break, effective after 2015: the $500,000 annual expensing limitation and $2 million investment ceiling amount was made subject to inflation indexing; expensing of qualified real property was made permanent without a complex carryover limitation that applied under prior law; the $250,000 expensing limitation that applied to qualifying real property under prior law was eliminated; and certain air conditioning and heating units became newly eligible for expensing.

Noting that there has been taxpayer confusion about making an expensing election for tax years that begin after 2014, the IRS announced that, for any tax year that begins after 2014, a taxpayer may make an expensing election for any expensing-eligible property without the IRS's consent on an amended Federal tax return for the tax year in which the taxpayer places in service the expensing-eligible property.

IRS releases next year's inflation adjustments for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker's compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

The IRS has released the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2018 for HSAs. For calendar year 2018, the limitation on deductions is $3,450 (up from $3,400 for 2017) for an individual with self-only coverage. It's $6,900 (up from $6,750 for 2017) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2018, an HDHP is a health plan with an annual deductible that is not less than $1,350 (up from $1,300 for 2017) for self-only coverage or $2,700 (up from $2,600 for 2017) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,650 (up from $6,550 for 2017) for self-only coverage or $13,300 for family coverage (up from $13,100 for 2017).

IRS's private debt collection program kicks off. IRS announced that beginning in April, it will start sending letters to notify “a relatively small group of individuals” with overdue federal tax that their accounts have been assigned to one of four private collection agencies (PCAs). The assignments were authorized by legislation enacted in 2014. PCAs are authorized to discuss payment options, including setting up payment agreements with taxpayers. But, as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. The IRS also warned taxpayers to be wary of scammers posing as PCAs, and to keep in mind that a legitimate PCA will only be calling about a tax debt that the person has had—and has been aware of—for years and had been contacted about previously in the past by IRS.

Reissued proposed regulations explain new partnership uniform audit rules. A law enacted in 2015 (The Bipartisan Budget Act of 2015, signed into law on Nov. 2, 2015) eliminated the TEFRA unified partnership audit rules (so-called because they were introduced in the Tax Equity And Fiscal Responsibility Act of '82) and the electing large partnership rules, and replaced them with streamlined partnership audit rules. Under these new rules, the IRS generally can't adjust partnership items on a partner's return except by a unified entity-level proceeding, which is binding on all partners and allows IRS to make the necessary corresponding adjustments on the partners' individual returns. The new rules generally are effective for returns filed for partnership tax years beginning after Dec. 31, 2017, but taxpayers can elect to apply them earlier. Additionally, certain small partnerships can elect out of the new partnership regime.

Proposed regulations on the new partnership uniform audit rules were issued in January of this year, but were withdrawn by the IRS for further review and approval after President Trump instituted a “regulatory freeze.” Now the IRS has reissued the proposed regulations explaining the new partnership uniform audit rules. These regulations would have a substantial impact on affected partnerships.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA

Q2 2017

Dear Tax Constituent:

The following is a summary of important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New guidance on how small businesses can use research credit to offset payroll tax. Businesses that increase certain research expenses may use a research credit to reduce their income tax liability. For tax years that begin after Dec. 31, 2015, eligible small businesses can take advantage of a new option enabling them to apply part or all of their research credit against their payroll tax liability, instead of their income tax liability. The option to elect the new payroll tax credit may be especially helpful for eligible startup businesses that have little or no income tax liability. To qualify for the new option for 2016, a business must have gross receipts of less than $5 million and may not have had gross receipts before 2012. Under the new rules, an eligible small business with qualifying research expenses can choose to apply up to $250,000 of its research credit against its payroll tax liability.

The IRS recently issued new guidance on this option for eligible small businesses to use the research credit to reduce payroll tax. Eligible small businesses choose this option by filling out Form 6765, Credit for Increasing Research Activities, and attaching it to a timely-filed business income tax return. The business claims the payroll tax credit on its employment tax return for the first quarter that begins after it files the return reflecting the election. For example, if a business files an income tax return on Apr. 10, 2017, with a Form 6765 attached reflecting the payroll tax credit election, it would claim the payroll tax credit on its Form 941, Employer's Quarterly Federal Tax Return, for the third quarter of 2017. An eligible small business that files annual employment tax returns claims the payroll tax credit on its annual employment tax return that includes the first quarter beginning after the date on which the business files the return reflecting the election. The eligible small business also must file Form 8947, Qualified Small Business Payroll Tax Credit for Increasing Research Activities, and attach it to the employment tax return. Under a special rule for tax year 2016, a small business that failed to choose the payroll tax option, but still wishes to do so, can still make the election by filing an amended return by Dec. 31, 2017.

Fast track settlement program made permanent for small businesses and self-employeds. The IRS announced that it has made permanent a program that allows small business/self-employed taxpayers and the IRS to reach agreement on tax disputes more quickly. It's called the Fast Track Settlement (FTS) program, and it's designed to help certain small businesses and self-employed individuals who are under examination by the Small Business/Self Employed (SB/SE) Division of the IRS. The FTS uses alternative dispute resolution techniques to help taxpayers save time and avoid a formal administrative appeal or lengthy litigation. As a result, audit issues can usually be resolved within 60 days, rather than months or years. Plus, taxpayers choosing this option lose none of their rights because they still have the right to appeal even if the FTS process is unsuccessful.

2017 luxury auto depreciation dollar limits and lease income add-backs released. Annual depreciation and expensing deductions for so-called luxury autos are limited to specific dollar amounts. These amounts are inflation-adjusted each year. The IRS has announced that for autos (not trucks or vans) first placed in service during 2017, the dollar limit for the first year an auto is in service is $3,160 ($11,160 if the bonus first-year depreciation allowance applies); for the second tax year, $5,100; for the third tax year, $3,050; and for each succeeding year, $1,875. These dollar limits are the same as those that applied for autos first placed in service in 2016.

For light trucks or vans (passenger autos built on a truck chassis, including minivan and sport-utility vehicles (SUVs) built on a truck chassis) first placed in service during 2017, the dollar limit for the first year the vehicle is in service is $3,560 ($11,560 if the bonus first-year depreciation allowance applies); for the second tax year, $5,700; for the third tax year, $3,450; and for each succeeding year, $2,075. For a light truck or van placed in service in 2017, the dollar figures are the same as for such vehicles first placed in service in 2016, except that the third-year amount is $100 higher.

A taxpayer that leases a business auto may deduct the part of the lease payment representing its business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that auto lessees can't avoid the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction. The amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. The IRS has released a new inclusion amount table for autos first leased during 2017.

IRS delays employer deadline to provide small employer HRA notice to employees. Generally effective for years beginning after Dec. 31, 2016, an eligible employer—generally, an employer with fewer than 50 full-time employees, including full-time equivalent employees, that does not offer a group health plan to any of its employees—may provide a qualified small employer health reimbursement arrangement (HRA) to its eligible employees, and such an HRA won't be treated as a group health plan. Thus, a qualified small employer HRA isn't subject to the tax law's group health plan requirements, including the portability, access, and renewability requirements of the Affordable Care Act (ACA, also known as Obamacare). HRAs are arrangements under which an employer agrees to reimburse medical expenses including health insurance premiums up to a certain amount per year, with unused amounts available to reimburse medical expenses in future years. The reimbursement is excludable from the employee's income.

The qualified small employer HRA rules generally require an eligible employer to furnish a written notice to its eligible employees at least 90 days before the beginning of a year for which the HRA is provided (or, in the case of an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which the employee is first so eligible). However, under interim guidance from the IRS, an eligible employer that provides a qualified small employer HRA to its eligible employees for a year beginning in 2017 isn't required to furnish the initial written notice to those employees until after further guidance has been issued by the IRS. That further guidance will specify a deadline for providing the initial written notice that is no earlier than 90 days following the issuance of that guidance.

Revised list of boycott countries. A taxpayer who participates in or cooperates with an unsanctioned international boycott may suffer reduced foreign tax credits and have subpart F income in relation to taxes and income attributable to the country the government of which sponsors or supports an international boycott. The following countries are on the Treasury's current list of countries which require or may require participation in, or cooperation with, an international boycott: Iraq; Kuwait; Lebanon; Libya; Qatar; Saudi Arabia; Syria; United Arab Emirates; and Yemen.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

--McAvoy + Co, CPA