Tax Planning in 2017 after the Third Quarter’s Federal Tax Developments
There were significant federal tax developments during the third quarter of 2017. To begin, the “big six” tax-writers in Washington D.C. released their unified tax plan on September 27, which proposes sweeping changes to the U.S. tax system under the Trump administration. The framework does not provide an effective date and will not itself be proposed as legislation. Instead, it serves as a template for the tax-writing committees to develop legislation that delivers fiscally responsible tax reform by broadening the tax base while reducing individual and corporate tax rates. Whether such reductions would apply to 2017, as well as to 2018, will remain uncertain, likely until late November or early December. Nevertheless, preparation for these business and tax planning contingencies should begin now. Click here to read about the seven things you should start thinking about now in anticipation of tax reform.
Simplified Per-Diem Increase for Post-September 2017 Travel
An employer may pay a per-diem amount to an employee on business-travel status instead of reimbursing actual substantiated expenses for away-from-home lodging, meal, and incidental expenses. If the rate paid does not exceed the IRS-approved maximums, then the reimbursement is not subject to withholding and does not need to be reported on the employee’s Form W-2.
The IRS publishes a simplified per-diem rate for all “high-cost” areas within the continental U.S. and another per-diem rate for all other areas within the continental U.S. As of September 30, 2017, the new high-cost-area per diem is $284 (up from $282), consisting of $216 for lodging and $68 for lodging, meal, and incidental expenses. The per-diem for all other localities is $191 (up from $189), consisting of $134 for lodging and $57 for lodging, meal, and incidental expenses.
Safe Harbor for Financially Distressed Homeowners Extended
The IRS has extended through 2021 guidance on the tax consequences of programs that involve payments made to or on behalf of financially distressed homeowners, including a safe harbor method for computing a homeowner’s deduction for payments made on a home mortgage.
For tax years 2010 through 2021, an eligible homeowner may deduct the lesser of: (1) the sum of all payments on the home mortgage that the homeowner actually makes during a tax year to the mortgage servicer or the state housing finance agency; or (2) the sum of amounts shown on Form 1098, Mortgage Interest Statement, for mortgage interest received, real property taxes, and if deductible for the tax year, mortgage insurance premiums.
The deduction for mortgage insurance premiums under Code section 163(h)(3)(E) expired at the end of 2016, but it is one of those tax provisions that has been repeatedly extended in the past. The IRS also extended penalty relief related to information reporting for mortgage servicers and state housing finance agencies.
Incorrectly Claimed Tax Credits for Health Insurance Premiums
In what appears to be the first case of its kind, although others are likely to follow, the Tax Court ruled that a taxpayer who did not qualify for premium tax credits under the Affordable Care Act (also known as Obamacare) because the taxpayer’s modified adjusted gross income exceeded 400% of the federal poverty level had to repay the incorrectly claimed premium tax credits. A sympathetic Tax Court noted that while the taxpayer’s state health insurance marketplace may have incorrectly informed taxpayers that they were eligible for the credit, the Court’s hands were tied by the Internal Revenue Code and regulations. The bright line test is whether the taxpayer’s income exceeded eligible levels, and if so, then any incorrectly claimed premium tax credits will need to be repaid.
Tax Relief for Victims of Hurricanes Harvey, Irma, and Maria
On September 29, 2017 President Trump signed into law the Disaster Tax Relief and Airport and Airway Extension Act of 2017. The Act provides temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. For individuals, tax relief includes loosened restrictions for claiming personal casualty losses, tax-favored withdrawals from retirement plans, suspension of limitations on charitable contributions, and the option of using the current or prior year’s income for purposes of claiming the earned income and child tax credits.
Business may claim a new “employee retention tax credit” of 40% for up to $6,000 of “qualified wages” for a maximum credit of $2,400 per employee. An eligible employer is any employer that conducted an active trade or business in a hurricane disaster area which, as a result of damage sustained by reason of the hurricanes, became inoperable on any day from the applicable disaster date. Eligible employees are employees whose principal place of employment on the applicable disaster date was with the eligible employer in a hurricane disaster area.
In addition, the IRS has granted specific administrative hurricane relief, for example, by extending various deadlines, encouraging leave-based donation programs for hurricane victims, and coordinating with state and local tax authorities. Recovering from a disaster of this magnitude takes time but the tax relief available for victims of Hurricanes Harvey, Irma, and Maria will continue to be available in order to assist our nation’s recovery efforts as we move forward.
IRS to Terminate its myRA Account Program
On July 28, 2017 the Treasury Department announced that it would begin winding down the myRA (i.e., the my Retirement Account) program—a type of government-administered Roth IRA initially offered by the Treasury Department that began in 2014. Noting that demand for and investment in the myRA program had been extremely low, the Treasury Department stated that it would phase out the program over the following months. The myRA program will no longer be accepting new enrollments, but existing accounts are to remain open and accessible so that individuals can continue to manage their accounts until further notice. Thus, individual accountholders can continue to make deposits and their accounts will continue to earn interest.
2017 Year-End Tax Planning
Finally, businesses may want to consider several general strategies in their 2017 year-end tax planning, such as use of traditional timing techniques for delaying income recognition and accelerating deductions. For example, taking inventory of what deductions and credits your business has been using and whether they remain available or will be removed in the near future can significantly impact your bottom line. With the exception of a handful of industry specific tax incentives, most temporary credits and deductions were permanently extended by the PATH Act.
One major tax deduction for many businesses is bonus depreciation. Property placed in service in 2017 is eligible for bonus depreciation at a 50% rate. The rate is reduced to 40% in 2018 and 30% in 2019. Bonus depreciation expires after 2019. Talk of “full expensing” under the unified tax plan is also an important consideration for year-end tax and business planning.
In 2013, the IRS issued final tangible property regulations (i.e., the “repair regs”) on accounting for costs to acquire, repair, and improve tangible property. The repair regs impact virtually all businesses by providing the rules for distinguishing between capital expenditures and deductible repairs or other types of deductible expenses. While taxpayers were expected to file change in accounting methods using the automatic consent procedure to retroactively comply with the repair regs for their first tax year beginning in 2014, taxpayers that are not yet subject to a capitalization audit may continue to file these accounting method changes using certain automatic consent procedures.
Payroll tax credit for small businesses
The IRS issued guidance in early 2017 explaining how a qualifying small business may elect to claim a payroll tax credit of up to $250,000 in lieu of the research credit. This election is useful to a business with no income tax liability against which to claim the research credit. The business must have less than $5 million of gross receipts in the election year and must not have had gross receipts in any tax year that precedes the five-tax-year period that ends with the tax year of the election.
This new option was available for the first time to any eligible small business for their 2016 tax year. However, those who already filed their 2016 return still have time to choose this option. Under a special rule for tax-year 2016, a small business that failed to choose this option and still wishes to do so, can still make the election by filing an amended return by December 31, 2017.
Business Use of Vehicles
Several year-end strategies involving both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees require an awareness of certain rates and dollar caps that change annually. Changes affecting 2017 include a drop in the standard business mileage allowance rate to 53.5 cents-per-mile, down from 54 cents-per-mile for 2016. The maximum depreciation limits for passenger automobiles first placed in service during the 2017 calendar year remain the same as 2016.
Approximately 2.5 million taxpayers are now earning income each month in the “gig” economy, also commonly referred to as the “sharing” or “on-demand” economy. Participation continues to swell and is expected to double by 2020. In recognition of the increasing importance of the gig economy, the IRS opened a “Sharing Economy Tax Center” this year on its website. It also is reportedly stepping up its audit coverage of taxpayers working in the “gig” economy.
Affordable Care Act
Despite Congressional attempts to repeal the Affordable Care Act (ACA), the basic structure of the ACA for businesses, both large and small, generally remains intact. If an employer is an applicable large employer based on the previous year’s employee head-count, employer shared responsibility provisions and employer information reporting provisions are triggered. Small businesses, however, are not unaffected by the ACA and should take the ACA into account in year-end planning. Some incentives in the ACA could help maximize tax savings for small businesses. Planning now, both to qualify for 2017 incentives and to meet 2018 compliance requirements, is advisable.
These are just some of the considerations that can yield tax savings for your business as the 2017 year-end approaches. Please feel free to contact us at the Royse Law Firm so we can discuss specific 2017 year-end strategies that might be particularly worthwhile for your business.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.