2017 has yet to produce any meaningful enacted federal tax legislation. While the House has introduced its tax reform bill, numerous questions remain. As this letter is published, the Senate has yet to weigh in. Although the process continues, how to pay for the proposals and what deductions will be eliminated or modified remain fiercely debated.
What does this mean for you? We believe comprehensive tax reform faces many challenges that may push enactment beyond year-end. If it is, based on the initial House draft, most of the provisions would not become effective until 2018. Consequently, our advice is to defer income until 2018 wherever practical. Even if Congress fails to enact any meaningful reform in early 2018, rates are not likely to increase, so deferral also makes sense from a traditional planning approach.
The Senate Finance Committee is expected to release its own version of a tax bill the week of Nov. 6. This year-end letter focuses on the House bill. Once the Ways and Means Committee has marked up this legislation and after the Senate delivers its version, we will issue tax alerts on the legislative proposals.
Our focus in this year’s letter is on the tax reform provisions being considered, regulatory developments including the new partnership audit regulations, critical issues in healthcare and employee benefits as well as state and local tax trends.
Tax planning should be addressed throughout the year and be an integral part of financial planning. As always, we encourage you to contact your Baker Tilly advisor to discuss how these issues impact your tax position.
Visit the sections below for our coverage of the most pressing year-end tax issues:
- Tax reform
- Research tax credit and small businesses
- Individual tax planning
- International taxation
- State and local taxes
- Liability allocation changes
- Healthcare update
- Employee benefits and executive compensation update
- New partnership audit regulations
- Accounting method changes under new revenue recognition standards
- Hurricane tax relief
Year-end tax planning reminders
- Take advantage of the IRC section 179 enhanced expensing deduction. Section 179 limits were permanently increased at the end of last year for the small business expensing limitation and phase-out amounts rose to $500,000 and $2 million, respectively. The special rules that allow expensing of computer software and qualified real property (qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property) were permanently extended.
- Maximize your retirement plan contribution. Whether you participate in a company-sponsored plan with a 401(k) or are self-employed and have your own plan, you should take advantage of the maximum contribution each year. Individuals who are 50 or older can also make a “catch-up” contribution, which for most types of plans is $6,000 for 2017.
- Be sure you have basis to fully utilize S corporation losses. A loan directly to the S corporation can allow you to utilize losses. Be sure the loan is properly documented. It is important to keep in mind that subsequent repayment may result in taxable income.
- Take advantage of the 15/20 percent tax rate on qualified dividend income. Qualified dividend income received in 2017 is taxed at the same favorable tax rates that apply to long-term capital gains. In general, the maximum tax rate on qualified dividend income is 15 percent or 20 percent depending upon your tax bracket. Dividend income is “qualified” if it is received from domestic corporations or certain (qualified) foreign corporations. In addition, for the dividend income to be qualified, the stock must have been held by the taxpayer for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (for certain preferred stock, more than 90 days during the 181-day period beginning 90 days before the ex-dividend date). The most common type of dividend that is not eligible for the 15/20 percent rate is dividends from REITs. REIT dividends are taxable as ordinary income at your personal marginal rates.
- Charitable contributions. As a reminder, if you have appreciated publicly traded securities, you should consider using these to make large charitable gifts rather than cash. You still get a charitable deduction equal to the fair value of the stock donated, but you do not pay tax on the appreciation. If you are making a substantial contribution, you will want to keep in mind the AGI limits applicable to charitable contributions. In addition, do not forget about AMT. If you expect to be in AMT this year, but not next year, you should consider deferring the gift until January as your tax benefit may increase by up to 11 percent if you expect to be in the maximum tax bracket next year.
Expiring tax provisions
Many corporate and individual tax provisions are not a permanent part of the IRC. These temporary provisions in previous years were extended as a part of a legislative package known as “tax extenders.” These tax extenders were typically passed either late in the year or early in the following year (retroactive to the beginning of the year), extending the expiring provisions for an additional one or two years. In the case of the Protecting Americans from Tax Hikes Act, signed into law in December 2015, certain tax extenders were made permanent.
In addition to providing the above-mentioned hurricane tax relief, the Disaster Tax Relief and Airport and Airway Extension Act of 2017, extended the Airport and Airway Trust Fund excise taxes through March 2018, which were previously set to expire at the end of September 2017. The only remaining provision set to expire at the end of 2017 is the application of the Oil Spill Liability Trust Fund financing rate under IRC section 4611(f)(2). Predicting whether the provision will be addressed by tax reform is difficult. In the absence of certainty, we recommend you prioritize your business needs when making decisions, monitor legislation and be prepared to act accordingly and practically in the event the rate is extended or made permanent as part of tax reform.
We will continue to keep you informed of the latest developments by sending updates to assist you with planning throughout the remainder of the year. See our 2017 Tax Planning Guide for additional ways to help you reduce your taxable income by taking advantage of every tax break to which you are entitled.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.