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Claiming bonus depreciation on your 2017 tax return may be particularly beneficial

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With bonus depreciation, a business can recover the costs of depreciable property more quickly by claiming additional first-year depreciation for qualified assets. The Tax Cuts and Jobs Act (TCJA), signed into law in December, enhances bonus depreciation.

Typically, taking this break is beneficial. But in certain situations, your business might save more tax long-term by skipping it. That said, claiming bonus depreciation on your 2017 tax return may be particularly beneficial.

Pre- and post-TCJA

Before TCJA, bonus depreciation was 50% and qualified property included new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified improvement property.

The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

But be aware that, under the TCJA, beginning in 2018 certain types of businesses may no longer be eligible for bonus depreciation. Examples include real estate businesses and auto dealerships, depending on the specific circumstances.

A good tax strategy • or not?

Generally, if you’re eligible for bonus depreciation and you expect to be in the same or a lower tax bracket in future years, taking bonus depreciation is likely a good tax strategy (though you should also factor in available Section 179 expensing). It will defer tax, which generally is beneficial.

On the other hand, if your business is growing and you expect to be in a higher tax bracket in the near future, you may be better off forgoing bonus depreciation. Why? Even though you’ll pay more tax this year, you’ll preserve larger depreciation deductions on the property for future years, when they may be more powerful — deductions save more tax when you’re paying a higher tax rate.

What to do on your 2017 return

The greater tax-saving power of deductions when rates are higher is why 2017 may be a particularly good year to take bonus depreciation. As you’re probably aware, the TCJA permanently replaces the graduated corporate tax rates of 15% to 35% with a flat corporate rate of 21% beginning with the 2018 tax year. It also reduces most individual rates, which benefits owners of pass-through entities such as S corporations, partnerships and, typically, limited liability companies, for tax years beginning in 2018 through 2025.

If your rate will be lower in 2018, there’s a greater likelihood that taking bonus depreciation for 2017 would save you more tax than taking all of your deduction under normal depreciation schedules over a period of years, especially if the asset meets the deadlines for 100% bonus depreciation.

If you’re unsure whether you should take bonus depreciation on your 2017 return — or you have questions about other depreciation-related breaks, such as Sec. 179 expensing — contact us.

The IRS urges prompt action for some filers

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Taxpayers who have expired Individual Taxpayer Identification Numbers (ITINs) and who need to file tax returns this season must act fast to renew their ITINs, as the renewal applications can take up to 11 weeks to process. ITINs are used by those who have federal tax obligations but don’t qualify for a Social Security Number. Among the numbers that expired in 2017 are those with middle digits of 70, 71, 72, and 80 or ITINs that haven’t been used on a return in the past three years. Learn more at http://bit.ly/2ErXe0i

Remind soon-to-be retirees about RMDs

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Do you have employees in their late 60s? If so, are they aware of the required minimum distribution (RMD) obligations beginning at age 70½ for their IRAs and possibly their 401(k) plans? It’s essential that they know what to expect when they reach that age so they can avoid a potentially whopping penalty. As their employer, you can stand to benefit from helping them out with a friendly reminder.

IRAs vs. 401(k)s

In most instances, IRA account holders must take RMDs on reaching age 70½. However, the first payment can be delayed until April 1 of the year following the year in which the individual turns 70½. (For inherited IRAs, RMDs are often required earlier.)

401(k) accounts are a different story. Account holders don’t have to begin taking distributions from their 401(k)s if they’re still working for the employer sponsoring the plan. Although the regulations don’t state how many hours employees need to work to postpone 401(k) RMDs, they must be doing legitimate work and receiving wages reported on a W-2 form.

There’s a notable exception, however: Workers who own at least 5% of the company must begin taking RMDs from the 401(k) starting at 70½, regardless of their work status.

If someone has multiple IRAs, it doesn’t matter which one he or she takes RMDs from so long as the total amount reflects their aggregate IRA assets. In contrast, RMDs based on 401(k) plan assets must be explicitly taken from the 401(k) plan account.

Other pertinent facts

Here are some additional RMD facts you can share with employees approaching retirement:

Calculation of RMD. The IRS determines how RMD amounts change as the account holder ages, using a formula and life expectancy tables. For example, at age 72, the IRS “distribution period” is 26.5, meaning that the IRS assumes that the individual will live another 26½ years. Thus, he or she must withdraw the percentage of the IRA or 401(k) account that is 1 divided by 26.5 (3.77%).

Beneficiary spouses. Account holders who have a beneficiary spouse at least ten years younger are subject to a different RMD formula that allows them to take out smaller amounts to preserve retirement assets for the younger spouse.

Tax penalty. The penalty for withdrawing less than the RMD amount is 50% of the portion that should have been withdrawn but wasn’t.

Form of distribution. RMDs can be in cash or be taken in stock shares whose value is the same as the RMD amount. Although this can be administratively burdensome for you as the employer, it allows your employees to defer incurring brokerage commissions on securities they don’t want to sell.

Informed employees

Remember, informed employees are happy employees. Educating your older employees about their RMD obligations can help maintain healthy morale among these employees and demonstrate to your entire workforce (and job candidates) that you care about retirement planning. Let us know how we can help with this critical effort.

A vision for “transformational” tax reform

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In a recent speech to the National Association of Manufacturers, House Speaker Paul Ryan urged Republicans to seize this “historic opportunity” to enact meaningful tax reform. With few details, he listed goals that included a simplified tax code, lower tax rates, improved global competitiveness for American businesses, elimination of special interest carveouts and permanent changes that give businesses certainty to plan for the future. Ryan projected that a realistic timeline for tax reform would be the end of 2017.

Raffensperger, Martin & Finkenbiner will continue to follow the potential tax reform. In truth, many of us thought the bill would be law by now, and the rates and changes would have been retroactive to January 1, 2017. Based on the timeframe, we anticipate that any changes would not be law until January 1, 2018. 

As of now, that makes proactive tax planning a little more challenging as what’s good this year may be altered in the future. However, we will continue to recommend options and new ideas that provide immediate benefit. We will still look at long-term plans but will be more conservative in our recommendations depending on the situation and circumstance.