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Howard Insights: Tax Reform Could Provide Year End Opportunities

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Dallas, Texas, December 2017– As the vote on H.R. 1, the “Tax Cuts and Jobs Act” nears, we are highlighting tax planning opportunities available before year end, along with proposed changes related to depreciation and business interest expense.

Opportunities before year end

Any (new or used) property placed in service before year end is eligible for 100% bonus depreciation. This applies to property acquired and placed in service after Sep. 27, 2017 and before Jan. 1, 2023.

Deduction for interest paid on home equity indebtedness is suspended after Dec. 31, 2017, so paying interest on a home equity loan before year end could be beneficial.

Property taxes, and state and local income tax deductions will be limited to $10,000 for tax years beginning after Dec. 31, 2017.  Paying property taxes before year end could be beneficial. Deductions for prepayments of 2018 state and local taxes are specifically excluded from the bill.

Miscellaneous itemized deductions that are subject to the 2% of AGI floor expires for tax years beginning after Dec. 31, 2017. Examples of these expenses are unreimbursed employee expenses, tax preparation fees, dues & subscriptions to professional organizations, safe deposit box rental, other investment expenses, etc.

For tax years beginning after December 31, 2017

Depreciation:

Section 179

  • Increases Section 179 limit to $1 million with a phase-out for cost of property placed in service exceeding $2.5 million.
  • Expands definition of “qualified real property” eligible for Section 179 expensing to include any of the following improvements to nonresidential real property placed in service after such property was first placed in service: roofs, HVAC property, fire protection and alarm systems, and security systems.

Bonus Depreciation

  • Allows 100% first-year bonus depreciation for property acquired and placed in service after Sep. 27, 2017 with phase out beginning after Dec. 31, 2022 as follows:
    • 80% for property placed in service after Dec. 31, 2022 and before Jan. 1, 2024.
    • 60% for property placed in service after Dec. 31, 2023 and before Jan. 1, 2025.
    • 40% for property placed in service after Dec. 31, 2024 and before Jan. 1, 2026.
    • 20% for property placed in service after Dec. 31, 2025 and before Jan. 1, 2027.

Additional Depreciation Provisions

  • Increases depreciation limitations for luxury automobiles.
  • Shortens recovery period for machinery or equipment used in a farming business from seven to five years. Also, the required use of the 150-percent declining balance method for property used in a farming business is repealed.
  • Eliminates the separate definitions of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Replaces those with one definition of qualified improvement property, subject to a 15-year recovery period (using straight line recovery method and half year convention).

Business Interest Expense:

  • Limits the net interest expense deduction for every business (regardless of form) to 30% of adjusted taxable income, which is calculated without taking into account:
    • any items of income or deduction not allocable to a trade or business
    • business interest or business interest income
    • net operating losses
    • qualified business income deduction
    • depreciation, amortization or depletion (for tax years beginning before Jan. 1, 2022)
  • Exempts taxpayers with average annual gross receipts of $25 million or less for the three-year period ending with the prior tax year.
  • Carries forward any disallowed interest expense indefinitely.

If you have questions about how provisions of the new law will affect you, please consult the Howard tax team and we will be happy to walk through your specific situation. Howard aims to share valuable insight that can help you prepare for the months ahead on your personal returns, as well as in businesses so we encourage you to visit the news section of our website where we will continue to post updates and announcements.