In looking back over the tax-related blog posts we’ve written over the past few years, I came across one dated November 2, 2015 which covered tax planning and legislative processes involving tax extenders. It noted:
Effective tax planning often requires lead time for implementation of material components. We recommend beginning the process now and not waiting until tax extender legislation is enacted, which may not happen until very close to year-end. Some elements of planning may involve waiting to pull the trigger until later in the year; nevertheless, plan development should begin now.
Two years ago, the question at hand involved whether a variety of favorable tax provisions would continue to apply going forward and how tax planning should be carried out in an environment of uncertainty. This year’s uncertainty involves whether a fundamental shift in our Federal system of income tax is about to unfold in connection with tax reform and, if so, when and how such changes will roll out. The legislative processes for proposed tax reform initiatives are littered with obstacles, with growing speculation that the prospect for material reform of the tax code is unlikely to have effect for 2017.
Tax planning carried out in an environment of uncertainty should nevertheless proceed with a focus on the traditional concepts of accelerating deductions and deferring income. Pushing taxable income from 2017 into 2018 will yield an economic savings by paying taxes later rather than sooner, with the hope that the eventual tax to be paid will be a lower amount due to the enactment of the much-discussed tax reform.
Proposed tax reform measures should be a consideration when identifying deductions for potential acceleration. For example, should the standard deduction be dramatically increased for 2018 and your anticipated level of charitable giving in 2018 will no longer yield a tax benefit, accelerating some of next year’s giving to 2017 may be appropriate. Paying 2017 state income taxes in 2017 rather than waiting until the April 15, 2018 filing due date may yield a similar benefit; however, be careful that the alternative minimum tax does not eliminate the anticipated benefit.
Tax provisions currently allow for a write-off of up to $510,000 of acquisitions of business-related equipment and qualifying improvements to real property. Tax reform proposals could effectively remove the cap entirely for qualifying equipment additions occurring after September 27, 2017. Where appropriate business justification exists for capital expenditures, the current $510,000 cap should be an immediate focus, with possible consideration for higher levels should the probability for the passage of tax reform provisions for 100 percent expensing look stronger as we get closer to year-end.
There are a variety of other tax planning initiatives that are relevant for consideration and identification. Discussing the implementation requirements of the best combination of moves that may be appropriate for your circumstances should begin as soon as possible.
Amidst all of this uncertainty, there is one thing we now know for certain. One of the hot topics this time last year involved tax planning related to proposed regulations which would have eliminated favorable discounts commonly used in connection with the valuation of gifts of interests in closely-held businesses. The Treasury Department recently announced that it will withdraw these proposed changes. That is good news for the owners of companies that would have been potentially impacted.
We invite you to contact us to discuss your goals and concerns in this regard and learn more about the options that may be best for your business.