Tax Reform Proposal – Tax Cuts and Jobs Act – Action Needed Before 12/31/2017

A Tax Report update prepared by WIPFLI

Following is a summary of some of the key changes affecting financial institutions along with some tax planning strategies that need to happen before the end of 2017! Unless otherwise noted, the changes would be effective for tax years beginning after 2017. The House and Senate plan to vote on the bill the week of December 18 and it appears they secured the votes needed to have a bill in President Trump’s hands before the end of the year.

Business Tax Reform – C Corporations

  • Creates a flat corporate income tax rate of 21%.  Reminder:  If the Tax Act is signed before the end of 2017 you will need to adjust your deferred tax assets/liabilities based using the reduced corporate rate at that time.
  • Repeals the Alternative Minimum Tax (AMT).
    • Banks with AMT credits carrying into 2018 will utilize them fully against regular tax with credits that exceed regular tax being refundable as follows:
      • 2018 - 2020 – 50% of the remaining AMT credit in excess of what is allowed against regular tax 
      • 2021 – 100% of any remaining AMT credit is refundable
  • Permits full expensing of fixed asset purchases.  One hundred-percent expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule.
  • Increases Section 179 expensing to $1 million. The phase-out amount would be increased to $2.5 million and indexed for inflation for tax years beginning after 2018.
  • Limits interest expense. The deduction for net interest expense incurred by a business is limited to 30% of the sum of the business’s adjusted taxable income, business interest income and the floor plan financing interest. This provision should not affect banks (it’s a “net interest expense” limitation and banks have “net interest income”).
  • Modifies net operating loss (NOL) deduction limitations. An NOL carryover or carryback will be limited to 80% of the taxpayer’s taxable income for loses arising in taxable years beginning after December 31, 2017. In addition, all carrybacks will be repealed except for a special two-year carryback in the case of certain losses incurred in the trade or business of farming, beginning after 2017. Losses arising in taxable years beginning after December 31, 2017, shall carryover indefinitely.
  • Retains the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income Housing Tax Credit, and the New Market Tax Credit.
  • Limits the use of like-kind exchanges. Section 1031 deferral of gain on like-kind exchanges will be available only for real property.
  • Disallows the entertainment deduction. No deduction (50% currently allowed) would be allowed for entertainment, amusement, or recreation activities, facilities, or membership dues relating to such activities. The 50% deduction for meal expenses associated with operating the trade or business is retained.
  • With regard to the cash method of accounting, increases the $5 million average gross receipts threshold for corporations and partnerships with corporate partners to $25 million (indexed for inflation). The requirement of meeting the test for all prior years is repealed.
  • Depreciation recovery periods of 39 year and 27.5 year remain unchanged and a singular Qualified Improvement Property category has been created with a 15 year recovery period to consolidate several previously separate categories.
  • Dividend received deductions reduced:
    • Previous 80% deduction (for stock ownership of 20% or more) reduced to 65%
    • Previous 70% deduction (for stock ownership of less than 20%) reduced to 50% 
  • Repeals issuance of new QZAB bonds.

Business Tax Reform – S Corporations

  • Introduces a new 20% deduction relating to “qualified business income” of individuals (including owner of a pass-through entity). 
  • Permits full expensing. One hundred-percent expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule.
  • Increases Section 179 expensing to $1 million. The phase-out amount would be increased to $2.5 million and indexed for inflation for tax years beginning after 2018.
  • Limits interest expense. The deduction for net interest expense incurred by a business is limited to 30% of the sum of the business’s adjusted taxable income, business interest income and the floor plan financing interest. This provision should not affect banks (it’s a “net interest expense” limitation and banks have “net interest income”).
  • Retains the Research and Development Tax Credit, Work Opportunity Tax Credit, Low Income Housing Tax Credit, and the New Market Tax Credit.
  • Limits the use of like-kind exchanges. Section 1031 deferral of gain on like-kind exchanges will be available only for real property.
  • Disallows the entertainment deduction. No deduction (50% currently allowed) would be allowed for entertainment, amusement, or recreation activities, facilities, or membership dues relating to such activities. The 50% deduction for meal expenses associated with operating the trade or business is retained.
  • Depreciation recovery periods of 39 year and 27.5 year remain unchanged and a singular Qualified Improvement Property category has been created with a 15 year recovery period to consolidate several previously separate categories.
  • Repeals issuance of new QZAB bonds.

What to do before 12/31/2017

 

  • With reduced tax rates in 2018 the general theme for planning is “defer income” and “accelerate deductions”.  Planning should be discussed with your Wipfli tax professional, and you should never spend a dollar to save 40 cents in taxes, but where it makes sense you should consider:
  • Prepaying expenses that are deductible for tax purposes – assuming you have made the tax election to deduct certain prepaid expenses when they are paid.
  • Charge off loans where appropriate under regulatory guidelines
  • Accelerate fixed asset purchases that can be 100% written off.
  • Sell securities with unrealized losses.
  • Consider a cost segregation study for buildings (those placed in service in 2017 as well as over the past few years if cost segregation was not previously done) to accelerate depreciation.
  • If you are a “cash basis” taxpayer – pay out your expense accruals before year-end.