Year-end tax planning this year will have an additional layer of uncertainty as a result of the tax reform legislation working its way through Congress. As of the date of this article, the different bills are still under consideration however some believe legislation will be passed into law in 2017. Although it is too soon to tell what will actually become law, there are several things that should be looked at now to manage your tax liability and lessen your tax compliance burden.
Here we look at a few of the more significant items that should be considered for the 2017 tax return year and some important reminders about tax filings. As always, any tax planning should be done in a manner consistent with your overall tax and investment strategy including, for example, getting the maximum tax benefit from tax-deferred savings plans (such as IRAs and 401(k) plans).
Tax Law Changes
Although there has been no major Federal tax legislation during 2017, there were several provisions of the Protecting Americans from Tax Hikes Act of 2015 (“PATH”) which only became effective last year, so are still rather new. Here are just a few of those tax law changes that may have year-end tax planning implications for you again this year:
- Business Property –The PATH Act contained several provisions affecting tax deductions related to business property. These include making the Section 179 deduction for capital investment in business property of $510,000 annually a permanent deduction (with an investment phase-out starting at $2,030,000 for 2017). The PATH Act also extends the bonus deprecation deduction through 2019 (with a 50% deduction in 2017, 40% in 2018 and 30% in 2019).
- Using IRA for Charitable Contributions –The PATH Act also makes permanent the provision that allows taxpayers age 70 1/2 years old or older to make direct charitable contributions from their IRA up to $100,000 per year. The taxpayers cannot claim a charitable contribution for these amounts, but they are not considered taxable income and can be used to satisfy an IRA owner’s required minimum distribution.
- Donations of Food Inventory – The special rule for donations of food inventory for an enhanced (above tax basis) deduction was made permanent.
- Gain Exclusion on Qualified Small Business Stock – This exclusion from taxable capital gains was made permanent.
- Research Credit Extended – The Research and Development Credit was made permanent, and was extended to apply against Alternative Minimum Tax for certain small businesses (“Eligible Small Businesses”). In addition, certain small businesses may be able to offset a portion of their payroll taxes with the credit (see below for additional information).
For more on tax planning ideas, including tax rate schedules for 2017, timing of income and deductions, health care breaks, tax payments, and many other useful information, please see our Web Tax Guide.
Safe Harbor for De Minimis Errors on Information and Payee Returns
New for 2017, there is a safe harbor for small errors which may be made on the filings of certain information returns (including Forms W-2 and 1099). This provides that if there are errors of $100 or less on income ($25 or less for withholding), the payor will generally not be required to issue a corrected return. This does not apply, however, if the payee requests a corrected statement.
Pension Plan Limit Changes for 2018
Included among those items that are periodically revised for cost of living adjustments are the dollar limitations for pension plans and other retirement related items. Effective for 2018, the new limit for 401(k) plans will be $18,500; this is the first increase in the 401(k) limit since 2015. The catch-up contribution amount for ages 50 and older remains at $6,000. The phase-out range for contributions to both traditional IRAs and Roth IRAs have also been increased though the contribution limits for both types of IRAs remain at $5,500 with an additional catch-up contribution of $1,000 for workers aged 50 or older.
Small Start-Ups May Be Able to Offset Payroll Tax Liability with R&D Credits
A special rule contained in the PATH Act allows a “qualified small business” to effectively monetize research and development (R&D) tax credits and instead use them to apply against a portion of their Federal payroll tax liability. There are detailed rules on whether a business is eligible for the election, but this option is applicable for C corporations, S corporations, and partnerships. An election to apply R&D credits against the payroll tax liability must be made with the timely filing of the income tax return. Importantly, the law provides a special rule for entities that may have already filed their 2016 return but did not take advantage of this election – those entities may be able to make an election on an amended return if filed no later than December 31, 2017. Click here for a more in-depth discussion on this topic.
If you have R&D credits that may be otherwise unused, you should consider contacting your Elliott Davis advisor to see if this provision would be of benefit to you.
Year-End Planning for
Although there is considerable uncertainty about tax reform as we go to press, and we don’t know if the proposed 21% corporate tax rate will make it into law, it is a pretty safe bet that corporate tax rates are not going to go up next year. Therefore, the best year-end planning strategy for C corporations may be the traditional one: accelerate deductions and defer income. Whether this makes sense depends on the particular circumstances of the corporation, but it may be possible to save taxes by pushing income out into a lower tax-bracket year.
A new development that will affect partnerships and LLCs taxed as partnerships is the new Centralized Partnership Audit Regime (“CPAR”). For tax years beginning in 2018, the previous TEFRA rules for how the IRS audits a partnership entity are replaced with a new system whereby generally any tax due as the result of an IRS exam is imposed on the partnership itself, rather than being allocated to – and collected from – the partners. There are special rules for certain small partnerships which can elect out of the new audit regime, and there are rules allowing a partnership to “push out” audit adjustments and tax liabilities to their partners. Because the tax imposed on the partnership would be assessed in a year later than the year under audit, there may be inequities in how that liability is borne – in other words, the partners who received the income being adjusted may not be the same partners who will indirectly bear the assessed tax. The CPAR rules are quite complex and well beyond this discussion. However, if your business is set up as a partnership, you should be aware of these changes. In particular, partnership agreements would need to be reviewed for the new rules as these may not have been addressed when agreements were drafted. You should contact your Elliott Davis advisor for assistance evaluating how the new partnership audit regime might impact you.