Major IRS guidance recently released — Is your business prepared for year-end?
Everyone is aware that the Tax Cuts and Jobs Act (TCJA) of 2017 was the largest piece of tax legislation in over 30 years. The goal was to simplify, simplify, simplify — but is that the reality? In some cases, yes. The adjusted tax brackets and the new higher standard deductions will certainly simplify individual tax returns. However, for business owners that may not be the case.
The TCJA introduced some significant changes that required new guidance from the IRS to clarify the implementation of the new law. That time has come, and recently the IRS provided major guidance on two of the tax codes — the qualified business income deduction and 100% bonus depreciation.
Qualified business income (QBI) deduction
The “pass-through deduction,” otherwise known as the “qualified business income deduction,” is one of the high-profile pieces in the tax reform. For tax years beginning in 2018 and ending in 2025, the QBI deduction can be up to 20% of a pass-through entity owner’s QBI (subject to restrictions that might apply at higher income levels). Pass-through entities are defined as sole proprietorships, single-member LLCs, S corporations, partnerships, and LLCs that are treated as partnerships for tax purposes.
The proposed QBI deduction rules are lengthy and complex with special computational and reporting rules that pass-through entities, trusts, and estates may need to follow to gain the information necessary to calculate allowable QBI deductions at the owner level.
Taxpayers can elect to aggregate their businesses for the QBI deduction, which is another level of complexity a tax adviser can help you with.
This is not the time for a do-it-yourself tax preparation scenario!
100% bonus depreciation
The 100% bonus depreciation allowance is for qualified property placed in service after Sept. 27, 2017 and before 2023. The most important change is the rate increased from 50% to 100% and the inclusion of new and used property acquired during this timeframe.
Qualified property is defined as:
- Property that has a recovery period of 20 years or less;
- Certain computer systems;
- Water utility property;
- Qualified film or television productions; and
- Qualified live theatrical productions.
Also included in the first year is qualified improvement property (QIP) acquired after Sept. 27, 2017 and placed in service before Jan. 1, 2018. There are some nuances with the QIP that need to be noted. Congress intended for QIP placed in service after 2017 to have a 15-year MACRS recovery period, which makes it eligible for bonus depreciation. However the language isn’t reflected in the TCJA, so if there isn’t a correction to fix this glitch, QIP placed in service after 2017 has a 39-year MACRS recovery period and therefore is ineligible for bonus depreciation.
This is just a quick highlight on a very complex depreciation option. Businesses that wish to take advantage of the new rules for fiscal tax years beginning in 2017, but ending in 2018, may have several bonus depreciation options. Consult a tax expert to make sense of it all.
Tax planning is essential
As a business owner, there may be actions you need to take before year-end to maximize the benefits or minimize the impact of the new laws. The recently released IRS proposed regulations to clarify the provisions might have additional guidance as the year progresses. Stay informed with a tax advisor who specializes in business taxation to get the maximum impact the TCJA allows.
Jake Peters, CPA, MST, is a principal with SVA Certified Public Accountants.
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