The process of tax planning has historically involved some tension arising from ongoing movements of important pieces of a puzzle. This issue is particularly relevant this year.
“At the end of September, a nine-page summary titled, Unified Framework for Fixing Our Broken Tax Code, was released,” says Michael Viens, CPA, director of Tax Strategies at Kreischer Miller. “President Trump, legislators from both parties, tax reform proponents and critics, news media commentators and others all have opinions as to the merits of proposed tax changes as well as expectations for when and if enactment will occur in time to allow for effective tax planning for 2017.”
The framework specifies one effective date, that involving an opportunity for 100 percent expensing by businesses relating to capital investments in depreciable assets other than structures, which would apply to transactions occurring after Sept. 27, 2017. Best-case timelines for possible enactment of tax reform measures suggest December as the earliest date for the Senate approval, which would follow action in the House.
Smart Business spoke with Viens about how businesses should approach tax planning as changes to the tax code loom.
How should businesses approach year-end tax planning for 2017?
Do not wait for tax reform legislative actions to finalize before initiating current year planning. Effective planning often requires a fair amount of lead time for implementation and last ditch efforts in close proximity to the end of December can present formidable challenges.
Equipment purchases may not be received and placed in service in time. Funding arrangements to cover expenditures may involve credit or other financial transactions that take some time. Deferral of income may require some level of negotiation with other parties. Begin the planning process well before year-end while holding off on the final steps.
Following traditional tax planning approaches involving deferral of recognition of income while accelerating expenses should be valid strategies no matter what happens in the way of tax reform.
What are the relevant tax provisions that may change going forward?
A proposed material increase in the standard deduction may eliminate itemizing of deductions for many taxpayers going forward.
Acceleration of payment of certain items that may yield a tax benefit in 2017, but not in 2018, should be considered — for example, the timing of charitable contributions and payment of state and local income and real estate taxes. Be careful with taxes, however, in order to avoid the potential impact of alternative minimum tax should it still be around for 2017 and not go away until 2018.
Business capital investments will potentially be eligible for 100 percent expensing under tax reform proposals. Current law permits a 50 percent upfront write-off for qualifying capital expenditures, which is scheduled to drop to 40 percent in 2018.
Should tax reform run into legislative issues and current law provisions continue to apply, this would suggest a more favorable result if capital investments are placed in service this year rather than next year.
Effective tax planning may involve identification of the lead time for ordering and fulfillment processes and implementation of action steps developed to have equipment available with appropriate maneuverability in arranging a placed-in-service date this year versus next year.
What other changes might require action on the part of businesses?
Consideration should be given to updating partnership agreements, where applicable, to allow for new partnership audit rules that will be applicable for tax years starting in 2018.
These new Federal tax rules, where applicable, can require that adjustments be made at the partnership entity level with the partnership liable for any related underpayment of tax. Partnership agreements should be reviewed to determine whether any changes should be made.
The tax planning process this year will likely involve greater complexity than last year. More effective results can be achieved by not holding off in anticipation of tax reform that may or may not occur or for which effective dates may not apply looking back, but rather only going forward. ●
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