While the Tax Cuts and Jobs Act (TCJA) continues to challenge both advisers and taxpayers, the upcoming federal elections could bring changes to the current tax law. Given this uncertainty, it’s imperative to have regular, consistent communication with your tax adviser to take advantage of favorable provisions and not run afoul of the law.
“Tax planning and strategy must be a fluid, continual process, not simply a year-end exercise,” says Matthew M. McKinnon, Director, Columbus Tax Practice Leader, Brady Ware & Company.
Smart Business spoke with McKinnon about what’s tripping up companies in the TCJA, and how they should prepare for federal changes, should there be any.
What questions do companies still ask about the Tax Cuts and Jobs Act?
When it comes to the TCJA, there are four key issues that companies look to understand better: choice of entity, enhanced depreciation, eligibility of activities for the Qualified Business Income Deduction and Opportunity Zones.
With choice of entity, many companies wonder if it’s preferable to be taxed as a C corporation. Now that the first set of tax returns reflecting the new laws have been filed, companies can compare actual tax liability for 2018 against what it would have been if they converted their tax status to a C corporation. This comparison, however, should be analyzed in conjunction with short- and long-term business goals, growth expectations and other factors.
Depreciation optimization is another area of discussion. Currently, bonus depreciation and Section 179 rules allow taxpayers to deduct the entire cost of certain eligible assets in the year of acquisition. While these rules generally apply only to tangible personal property, a few exceptions exist for specific types of real property. Consequently, there has never been a better time to make capital expenditures, given today’s favorable depreciation provisions.
At a high level, the new Qualified Business Income Deduction offers a 20 percent deduction for qualified business income, with respect to any qualified trade or business of the taxpayer — and the law specifies what can be considered a qualified trade or business. Compliance, however, can be difficult, as there are many factors the activity must meet to qualify, especially when considering rental real estate.
Without a doubt, Opportunity Zones are the most asked about provision of the TCJA. Potential investors in these economically distressed communities can invest realized capital gains from the sale of other assets into a Qualified Opportunity Fund, which will invest in qualified property or a qualified business. In return, investors can realize temporary tax deferral of the realized gain, a step-up in basis to offset portions of the realized capital gain and permanent gain elimination on post-investment appreciation of the property or business.
How should companies plan their tax strategy given the uncertainty ahead?
For income tax planning, stay the course. Run your business and use the current rules to be as tax efficient as possible. If President Trump is re-elected, the landscape should remain largely unchanged until the next election. If a Democratic candidate wins in 2020, increases in tax rates would likely not be effective until Jan. 1, 2022, at the earliest, given the time frame in which the TCJA became law. Once the results of the 2020 election are known, businesses and their advisers can make the necessary adjustments to income tax strategy.
Estate and succession planning matters, however, should be addressed now. The estate and gift tax exemption has never been higher — $11.4 million per individual in 2019. Most of the Democratic candidates’ tentative tax plans include significant changes to the estate tax structure, such as elimination of the basis step-up for inherited assets and rollback of the exemption to the 2009 amount of $3.5 million.
How can companies avoid being caught in an unfavorable tax situation?
Communicate with your adviser. Have regular meetings to review your current and forecasted operations, potential transactions and short- and long-term business plan. The more your adviser knows about where you are and where you want to go, the more he or she can be proactive and nimble with tax strategy recommendations.
Insights Accounting is brought to you by Brady Ware & Company